Wall St Rallies as Cooling Inflation Boosts Peak Rate Bets
Wall Street’s main stock indexes climbed on Tuesday as cooler-than-expected inflation data boosted expectations that the Federal Reserve was done raising interest rates and could start cutting them next year.
Both the S&P 500 and the tech-heavy Nasdaq were at a two-month high after data showed that U.S. consumer prices were unchanged in October amid lower gasoline prices.
Core prices, which exclude the volatile food and energy components, rose 4.0% compared to economists’ estimate of a 4.1% increase.
“We’re happy to see both headline and core CPI come in lower than expected. It’s telling us that the Fed is done, there’s nothing left for it to do here,” said Thomas Hayes, chairman at hedge fund Great Hill Capital at New York.
“This is what the Fed was looking for, slowing inflation, slowing labor market and the economy’s holding up at the same time.”
Following the data, traders erased bets the Fed will raise borrowing costs any further and piled into bets on rate cuts starting by May.
U.S. Treasury yields dropped, with the two-year yield, which best reflects short-term interest rate expectations, sliding to two-week lows. [US/]
That in turn lifted megacap-growth stocks such as Nvidia, Alphabet, Amazon.com and Tesla up between 1.7% and 5% in early trading.
The small-cap Russell 2000 index jumped 3.3%.
Wall Street’s main indexes have seen a strong rebound in November on expectations that U.S. interest rates were near their peak, even as Fed Chair Jerome Powell last week left the door open to further tightening.
Fed Vice Chair for Supervision Michael Barr is set to testify before the Senate Banking Committee, while investors will parse comments from Cleveland Fed President Loretta Mester and Chicago Fed chief Austan Goolsbee later in the day.
Focus is also on negotiations by U.S. lawmakers over a funding bill, as lawmakers face an end-of-week deadline to fund the federal government.
U.S. House of Representatives Speaker Mike Johnson said on Tuesday he thinks the House will pass a short-term spending bill to avert a partial government shutdown beginning on Saturday.
At 9:36 a.m. ET, the Dow Jones Industrial Average was up 330.19 points, or 0.96%, at 34,668.06, the S&P 500 was up 60.77 points, or 1.38%, at 4,472.32, and the Nasdaq Composite was up 256.49 points, or 1.86%, at 14,024.23.
Snap Inc shares jumped 9.2% following news that Amazon.com will allow Snapchat users in the United States to buy some products listed on the ecommerce company directly from the social media app.
Home Depot gained 5.3% after the U.S. home improvement chain beat quarterly profit estimates.
Fisker slid 17.3% after the electric-vehicle startup slashed its 2023 production forecast.
Advancing issues outnumbered decliners by a 13.89-to-1 ratio on the NYSE and by a 5.44-to-1 ratio on the Nasdaq.
The S&P index recorded 31 new 52-week highs and no new lows, while the Nasdaq recorded 59 new highs and 45 new lows.
While the CPI reading was likely the biggest concern, O’Rourke said that investors were also still digesting Moody’s weaker U.S. credit outlook issued after market close on Friday.
A majority of traders are betting that the Fed will keep interest rates unchanged this year, with odds of a cut of at least 25 basis points in May standing at nearly 46%, according to the CME Group’s FedWatch tool.
Several policymakers this week have pushed back against rate cut expectations, with some stressing on a data-dependent approach to monetary policy.
Richmond Fed President Thomas Barkin on Thursday said that while there’s been “real progress” on inflation, it is yet unclear if the U.S. central bank will need to push its policy rate higher to finish the job
“We have had rates roll over here a little bit and I think that’s one of the reasons we have seen this rally over the last couple of weeks,” said Chuck Carlson, chief executive officer at Horizon Investment Services in Hammond, Indiana. “If you think this rally has legs, yesterday gave you an opportunity to go buy some stocks today.”