The core CPI, which excludes the volatile food and energy prices, advanced 6.3% on an annual basis in October, after rising to a 40-year high of 6.6% in September and compared with market expectations of 6.5% gain.

The monthly headline CPI increased 0.4% in October, unchanged from September, and less than economist’s expectations of 0.6%. Monthly core Inflation, the Federal Reserve’s preferred CPI gauge, slowed to 0.3% from a previous 0.6%. After months of stubborn inflation glimmers of hope has emerged. While inflation is still high and painful, it is finally beginning to show signs of turning a corner. The CPI report provided early evidence that the Fed’s efforts to slow persistently high inflation has started easing price pressures. The central bank has lifted interest rates from near zero to nearly 4% in 2022 aiming to slow consumer demand.

The lower inflation readings acted as a strong headwind for the markets, invigorating hopes that the Federal Reserve might consider a modest 50-basis-point hike at the December meeting. The S&P 500 index jumped more than 5.5% on Thursday (its best one-day performance since April 2020), after the inflation data was released. The massive move came amid a significant retreat in the U.S. dollar and Treasury yields, as investors adjust rate hike expectations.

According to the CME’s Fedwatch tool, markets are now pricing in 85% chances of a smaller 50-basis-point rate increase at the conclusion of the December FOMC policy meeting, and a 55% likelihood of a 25-basis-point hike at the January meeting.

On Thursday, a few Fed officials suggested that interest rates will still need to rise to a level where they are clearly weighing down the economy, even if the pace is slower. Once rates are high enough, the Fed is likely to hold them there for some time.

Also, the market is now expecting a lower terminal rate. The benchmark U.S. 10-year Treasury yield plummeted a whopping 26 basis points from 4.09% to 3.83%, while the two-year U.S. Treasuries slipped from 4.58% to 4.33%.

Despite the reduction of the inflation rate in October, it is still far away from the Federal Reserve’s 2% target. Price increases remain far faster than target and are expected to remain abnormally brisk till the end of 2022. A single month of modest improvement in the data is not enough to raise confidence that the rapid price increases will quickly ease. As a reminder, we have seen several false declines in the CPI print throughout 2022. Still, the underlying details of the CPI report showed encouraging trends, which could help inflation cool down more meaningfully in 2023.