The better-than-expected inflation numbers released in the United States last Thursday caused a shift in sentiment on Wall Street. Growth firms, which saw steep drops this year, have surged as prices skyrocketed, while defensive sectors, which were previously favoured, have been abandoned.

To put things in perspective, Nasdaq recorded one of the best two day rallies this year as the index jumped 9.5%, while a less tech heavy S&P 500 index rose 6.4% during the same timeframe. At the same time, the pharmaceutical and arms manufacturing companies experienced sharp declines on Friday.

With this new inflation data, the Fed may decide to lighten up on interest rate hikes for the time being. Bond market price gains corroborated this theory, as the yield on 10-year Treasuries dropped below 4% on Monday, reaching 3.86% level.

While the shift in sentiment is encouraging, no one can predict what the Federal Reserve will decide. Inflation has been showing signs of moderation, so the markets currently believe that after four straight hikes of 0.75 percentage points, an increase of no more than 0.5 percentage points would be reasonable.

Some market analysts believe the time has come for a slowdown in the pace of interest rate increases. A too-aggressive policy may run the economy into a recession, as rising finance cost normally leads to cost-cutting measures in companies in the form of redundancies. However, as Jerome Powell indicated in his past speeches, they will not rush to cut rates in order to ensure that inflation is under control, regardless of cost for the economy. Therefore, despite the slowdown inflation, it is still hard to imagine the Fed retracting its previous remarks.

Even in Israel, where inflation is half of what it was in the US previous to the recent reading, interest rates are expected to climb by at least 0.5% to 3.25% next week. Indeed, the Head of the Bank of Israel has declared on several occasions that they intend to maintain the high level of interest rates for the same reason as stated by the Fed’s Chair.

So, how did the higher-than-expected inflation figure affect the Israeli capital market? The bond market saw price gains and yields fall as a result. A lower interest rate means lower corporate financing costs. And this is where another component of the Israeli capital market has reaped the benefits of US economic news – heavily indebted real estate companies. As a result of Thursday’s inflation reading, the real estate sector rose in value.

Last but not least is the exchange rate. With inflation showing signs of deceleration, interest rates may not climb as sharply, providing conditions for the USD’s value to decline. In fact, the USD/NIS exchange rate has already fallen by 4% in the last several days.