Inflation nation: Why is the ASX 200 marching higher today?

There's a good reason ASX 200 investors keep a close eye on these figures coming out of the United States.

Key points
  • The ASX 200 is up 0.4% in afternoon trade
  • US markets closed higher overnight following slightly lower-than-expected inflation levels in November
  • Analysts caution that a soft landing for the world's top economy isn't in the bag just yet

The S&P/ASX 200 Index (ASX: XJO) is up 0.4% in afternoon trade, having earlier posted gains of 0.6%.

Technology stocks are faring particularly well, with the S&P/ASX All Technology Index (ASX: XTX) up 1.2% at this same time.

This follows a similar trend in United States' markets, with the S&P 500 Index (SP: .INX) gaining 0.7% overnight and the tech-heavy Nasdaq Composite (NASDAQ: .IXIC) closing up 1%.

Today's lift in the ASX 200 comes on the back of the latest inflation report out of the United States.

A girl stands at a wooden fence holding a big, inflated balloon looking at dark clouds looming ominously behind her.

Image source: Getty Images

Why is the US inflation reading helping boost the ASX 200 today?

The US is a long way from our shores geographically.

But the influence of the world's top economy on the performance of ASX 200 shares is significant. And one of the biggest factors investors are watching from the US is the inflation readings.

Lower inflation levels will flag a more dovish policy response from the Federal Reserve, while sticky inflation will likely mean rates will remain higher for longer.

And the CPI figures released by the Labor Delopartment overnight came in a touch lower than consensus expectations.

Economists had predicted headline inflation would increase by 0.3% from October to 7.3%. But the number surprised to the downside, with CPI increasing 0.1% to 7.1% from a year earlier.

"This is not an outlier. In fact, today's report showed a fairly broad-based slowdown," Omair Sharif, founder of Inflation Insights, said.

Highlighting why ASX 200 and international stock market investors keep a close eye on US inflation figures, Bloomberg notes that US inflation reports have seen the S&P 500 gain or lose an average of 3% over the past six CPI releases. The average daily move is approximately 1.2%.

What the experts are saying

With the ASX 200 joining in the US market rally, Callie Cox, US investment analyst at eToro, said the CPI numbers were good news, but cautioned investors not to get overexuberant:

What we're in now is the definition of a soft landing. Slowing price growth could show the Fed that it may be time to take the foot off the brake…

This report could be the good news the market has needed to build a foundation just above the lows. But investors need to be careful. Inflation still isn't fully handled, and it's easy for markets to get carried away. We may not see new highs until inflation is fully under control.

Bloomberg economists Anna Wong and Eliza Winger said the CPI data could see a pause in rate hikes early next year.

"The surprisingly soft November CPI print adds to the case that disinflation is building," they said. "By the late-January FOMC meeting, some Fed officials may conclude there's enough 'compelling' evidence to start talking about pausing rate hikes."

Commenting before the release of the CPI data, David Bassanese, chief economist at BetaShares said (courtesy of the Australian Financial Review):

We're going to see a pretty big market reaction regardless of the result because it's one of those numbers where the market is hugely sensitive. That's because ultimately, everything boils down to the question of how quickly can inflation in the US fall and does it take a recession to do it?

If inflation in the US continues to ease in 2023 without the Fed ushering in a recession via aggressive tightening, the ASX 200 should receive some further welcome tailwinds.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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