Major News: Truss Policy U-turn and CPI Report | Daily Market Analysis

Key events:

US - Retail Sales (MoM) (Sep)

US - Core Retail Sales (MoM) (Sep)

The US inflation data for September was released. The UK market was more stable amid signs that Prime Minister Liz Truss, under pressure from her own party, would abandon a controversial tax cut plan. Saudi Arabia responded to US criticism of its support for OPEC's oil production cuts, adding for reassurance that the Biden administration had asked it to delay the decision until after the midterm elections. Here's what you need to know about the financial market on Friday, Oct. 14.

● US surprise rise in inflation

The consumer price index rose 0.4% in September, again exceeding consensus forecasts and showing that inflation continues to gain momentum. Excluding food and energy prices, core CPI inflation rose 0.6% in September and 6.6% over the past year, a new cycle high. Lower gasoline prices again put downward pressure on inflation.

Food price inflation is down slightly from the summer months but remains very high compared to pre-pandemic levels. Core inflation finally brought some relief with lower prices for clothing, used cars, and education and communications goods. However, core service inflation more than offset the relief received in the goods sector. Core service inflation was 0.8% in September, the largest monthly gain since 1982. Rising prices for housing, health care, and transportation services drove service sector inflation higher.

Yesterday's consumer price index report should force the FOMC to go for another 75 bps rate hike at the November 2 meeting. After that, inflation will start to slow enough that the FOMC will feel comfortable moving to a 50bp rate hike for the December meeting. Nevertheless, a 50 bps tightening would still represent a very rapid pace of monetary tightening, and it would reflect the still unrelenting inflationary pressures in the economy. Core CPI inflation over the past three months has been 6.0% on an annualized basis, and it will take much more than a gradual slowdown before the FOMC feels that this problem is well under control.

● British market stable amid expectations of a reversal in Truss policy

The UK bond and stock markets stabilized, and the pound rose amid signs that opposition from lawmakers in her own party will force Prime Minister Liz Truss to abandon most, if not all, of her planned tax cuts.

Truss reiterated that she would not cut government spending to balance the sweeping tax cuts and energy subsidies that have been her first steps since taking office. That would give her the choice of either abandoning the tax cuts or dramatically increasing borrowing. The latter option would hurt the Conservative Party's core electorate of middle-class homeowners with mortgages.

The pound gained 2 percent against the dollar at $1.3245, and the yield on the benchmark 10-year bond fell to 4.183 percent.

● Saudi Arabia resists US criticism

Saudi Arabia criticized US warnings about the "consequences" of its decision to cut oil production starting next month, saying that the OPEC+ decision was made solely to balance the global market.

The Biden administration described the move as a betrayal of US-Saudi relations because it would bolster Russia's revenues. In a published statement, the Saudi foreign minister also noted that the US had asked him to postpone the production cut until after the midterm elections in November.