U.S. stocks soared and Treasuries rallied on Thursday after closely watched October inflation data turned colder than expected, paving the way for lower rate hikes from the Federal Reserve.
Wall Street’s benchmark S&P 500 gained 4.3% in afternoon trade in New York, while the tech-heavy Nasdaq Composite jumped 5.8%.
In government bond markets, the two-year Treasury yield, which is particularly sensitive to changes in interest rates, slipped 0.3 percentage points to 4.32%. The 10-year Treasury yield fell 0.28 percentage points to 3.86%. Yields fall when prices rise.
The rebound in markets came after the US consumer price index for October hit 7.7%, marking the smallest 12-month increase since January and a sharp decline in the annual inflation rate of 8.2. % in September. Economists were expecting an 8% increase.
The core CPI reading, which excludes food and energy prices, landed at 6.3% year-on-year, below expectations of 6.5% and September’s reading of 6, 6%.
The dollar fell immediately after the CPI report, trading down 1.4% against a basket of six peers.
The lower-than-expected readings ease pressure on the Fed to maintain its policy of aggressively raising interest rates to fight inflation. The central bank has granted four consecutive 0.75 percentage point hikes this year to slow price growth.
Fed Chairman Jay Powell signaled earlier this month that the central bank would slow the pace of monetary tightening but arrive at a higher-than-expected terminal rate.
Former US Treasury Secretary Lawrence Summers said earlier this week that the terminal rate could reach “6 [per cent] or more.” But markets now expect the Fed’s benchmark interest rate to peak at around 4.8% in May 2023, after previously predicting a peak of just over 5% in June.
The CPI numbers “will be a catalyst, I think we’ll have a pretty good market rally through the end of the year,” said Jim Paulsen, chief investment strategist at Leuthold Group.
“The fact that the Fed may slow from here means what could erupt is not just a conversation about recession rather than inflation, but a conversation about avoiding a recession altogether,” Paulsen said. “Maybe we’ll have a soft landing.”
JPMorgan analysts said the latest CPI numbers supported the idea that “a decent amount of inflation” over the past year “will prove temporary or transitory”, reviving a word that Powell s is mocked for using it to describe inflation at this time last year.
Traders are also pricing in the upcoming results of this week’s midterm elections. A day after polls closed, elections in several states had yet to be called, leaving control of the Senate and House up in the air. However, analysts said the Republican Party’s results so far had already undermined pollsters’ predictions of a “red wave” in both legislative chambers.
In Asia on Thursday, the Japanese Topix lost 0.7%, the Hang Seng index in Hong Kong fell 1.7% and the Chinese CSI 300 index of stocks listed in Shanghai and Shenzhen fell 0.7%. .
Europe’s Stoxx 600 gained 2.7% and London’s FTSE gained 1.1%.