(Bloomberg) — Stocks jumped in a rally to ease buying everything, as slower-than-expected price growth fueled bets that the Federal Reserve may scale back its aggressive pace of interest rate hikes.
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The S&P 500 climbed 5.5% for the best reaction from the first day of a CPI report since at least 2003, when records began. More than 90% of stocks in the benchmark were in the green. The rally caught short sellers wrong, helping to fuel huge gains. The shift in sentiment also helped crypto markets stabilize despite the turmoil surrounding the FTX crypto exchange.
Headline inflation hit 7.7%, the lowest since January, before Russia’s war in Ukraine pushed up commodity prices. More important for the Fed, the main measure that excludes food and energy slowed more than expected.
Thursday’s strong rally only partially offset sharp losses for risk assets hit this year by Federal Reserve tightening. The S&P 500 is still down 17% and the Nasdaq 100 is down nearly 30%, both heading for their worst years since 2008.
Treasuries rose, sending the yield on two-year bonds, more sensitive to monetary policy, down 28 basis points. Interest rate traders cut the odds of another rate hike by three-quarters of a point in December to almost zero, while continuing to raise prices by half a point.
“The first downward inflation surprise in months will inevitably be met with cheers in the equity market,” wrote Seema Shah, chief global strategist at Principal Asset Management. “A 0.5% rise, not 0.75%, in December is clear, but until we get these types of CPI reports out, the pause is still some way out.”
Fed officials appear to favor tapering interest rate hikes after a run of four major hikes. They also stressed the need for the policy to remain strict.
Dallas Federal Reserve President Laurie Logan said it may soon be appropriate to slow down to better assess economic conditions. Mary Daly of San Francisco said the moderation was “good news” but noted that “the pause is not the discussion, the discussion is being withdrawn.”
Swaps markets pulled bets on a peak rate to just under 4.9% in the first half of next year, from more than 5% ahead of the CPI data.
Market reaction to the CPI report
Rick Reeder, Chief Investment Officer of Global Fixed Income at BlackRock Financial Management Inc.:
“Today’s CPI report showed some improvement as some of the previously elevated drivers of inflation, such as used cars, began to decline at a faster pace.”
Michael Landsberg, Chief Investment Officer, Landsberg Bennett Private Wealth Management:
“We are preparing for an environment where interest rates stay higher for a longer period of time. Investors should be more concerned about the effect that rising interest rates in a slowing economy have on the values of their portfolios, rather than the current level of inflation.
Max Gochmann, Chief Investment Officer for AlphaTraI:
“We expected there to be a slowdown in core commodity prices, but the decline in services was also a bigger bonus than any banker will get this year.” However, that won’t sway the Fed from reconsidering a 50 basis point hike in December, so traders are tempering their initial enthusiasm.”
Ipek Ozkardeskaya, senior analyst at Swissquote Bank:
“Hallelujah! We have finally seen a strong hit in terms of US inflation. Both headline and core numbers were lower than expected. And that helped temper the Fed’s hawkish expectations, pushing the US dollar and yields lower. The mild inflation was a breath of fresh air for the entire market.”
Guillermo Hernandez Sampere, head of trading at asset manager MPPM GmbH:
“Pivot Party will start right now, short squeeze will ignite the rally. If the rest of the money goes into effect, we’re going to see declines for a while.”
James Atty, Investment Director at Aberdeen Asset Management:
“Stocks will love that and are likely to pick up the baton and keep running.” Of course, this could make the Fed uncomfortable at this early stage in the disinflation process, so watch out for Fedspeak if stocks get too frothy.”
Key events this week:
Some of the major moves in the markets:
The S&P 500 was up 5.5% as of 4:00 p.m. New York time
Nasdaq 100 up 7.5%
Dow Jones Industrial Average rose 3.7%
MSCI World index rose 4.5%
The Bloomberg Dollar Spot Index fell 2%
The euro rose 1.8% to $1.0196
The British pound rose 3.1% to $1.1713
The Japanese yen rose 3.6% to 141.26 per dollar
Bitcoin rose 15% to $18,080.76
Ether rose 21% to $1,336.02
The yield on the 10-year note fell 27 basis points to 3.82%
Germany’s 10-year bond yield fell 16 basis points to 2.01%
The yield on UK 10-year bonds fell 16 basis points to 3.29%
West Texas Intermediate crude rose 0.5% to $86.27 a barrel
Gold futures rose 2.5% to $1,756.90 an ounce
This story was created using Bloomberg Automation.
This story was created using Bloomberg Automation.
–With assistance from Macarena Munoz, Farah Elbahraoui, Emily Graffeo, Lu Wang, Richard Henderson, Srinivasan Sivabalan, Isabelle Lee, Vildana Heyrich, Peyton Forte and Sagarika Jaisinghani.
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