Market Reaction: Stocks and Bonds Seek a New Equilibrium

Core CPI hits a four-year low, and the impact on financial markets is immediate. Equities are often most sensitive to inflation expectations and monetary easing, and in the context of moderate inflation data, risk assets received a short-term boost. Especially among growth-oriented tech stocks, the present value of future cash flows is highly sensitive to interest rates, and expectations of rate cuts make these stocks more attractive.
In the bond market, the decline in core CPI reflects expectations of lower inflation and also puts downward pressure on bond yields. Lower yields mean higher bond prices, which is a short-term positive for fixed income investors. However, for investors seeking returns, further declines in yields may reduce bond attractiveness, prompting capital to flow into stocks or other high-risk assets.
The foreign exchange market is also reflecting this change. Adjustments in inflation expectations and interest rate differentials may put some depreciation pressure on the US dollar, especially against currencies of countries with more persistent inflation. A low-inflation environment often enhances the purchasing power of the domestic currency, but international capital seeking higher yields may flow out of dollar assets.
Overall, the market re-pricing driven by the new low in core CPI is part of a global search for a “new equilibrium.”