Wall Street roared on Wednesday after inflation cooled more than expected last month, sparking speculation that the Federal Reserve might not have to be as aggressive on raising interest rates as once feared him.
The S&P 500 rose 1.9% in a broad-based rally launched after a report showed the country’s biggest economic challenge, inflation, slowed to 8.5% at the consumer level last month, compared to 9.1% in June. Tech stocks, cryptocurrencies and other hardest-hit investments of the year were among the day’s biggest gainers.
The Nasdaq composite, whose many high-growth and expensive-looking stocks have been particularly vulnerable to interest rates, rose 2.5%, leading the market. Bitcoin was up 3.3% to hit $24,000, and the Dow Jones Industrial Average was up 469 points, or 1.4%, at 33,244 as of 1:34 p.m. EST.
Much of the slowdown in inflation in July was due to lower gasoline and oil prices. But even after ignoring that and food price volatility, so-called “underlying inflation” held steady last month instead of accelerating as economists had expected.
The data encouraged traders to reduce bets on how much the Fed will raise interest rates at its next meeting. They now see a half-percentage-point hike as the most likely outcome, according to CME Group. A day earlier, they were betting on a more aggressive 0.75 percentage point hike, the same as the last two increases.
Such differences may seem insignificant, but interest rates help determine where prices go in financial markets. And higher rates tend to lower the prices of everything from stocks to commodities to crypto.
Bond prices shot up immediately after the inflation report was released, dragging bond yields down. The two-year Treasury yield, which tends to follow Fed expectations, fell to 3.14% from 3.27% on Tuesday evening.
The 10-year yield fell more slowly from 2.78% to 2.76%, narrowing the distance below the two-year yield. Many investors consider such a gap to be a fairly reliable signal of an upcoming recession.
Recession worries have been mounting as the highest inflation in 40 years weighs on households and businesses around the world. The Fed and other central banks have raised rates to slow the economy in hopes of stamping out inflation, but they risk stifling it if they act too aggressively.
“It’s a very sharp path they’re trying to take here,” said Brian Nick, chief investment strategist at Nuveen.
True, inflation is still painfully high, and is expected to remain so for some time. But Wednesday’s data nonetheless rejuvenated Wall Street, which faltered on a stronger-than-expected jobs report on Friday that raised expectations for a more aggressive Fed. That bolstered hopes that a spike in inflation — and therefore the Federal Reserve’s most aggressive rate hikes — could be on the horizon.
“It’s a step in the right direction, but bear in mind that we have many miles ahead of us before inflation normalizes,” said Mike Loewengart, managing director, investment strategy, at E -Morgan Stanley trade.
The Federal Reserve will receive some highly anticipated reports ahead of its next interest rate announcement on September 21, which may also change its stance. These include reports showing hiring trends in the economy due September 2 and the next consumer inflation update due September 13.
More immediately, this week’s reports will show how wholesale inflation is doing and whether US households are further reducing their expectations for inflation ahead, an influential data point for Fed officials.
Wednesday’s inflation data nonetheless helped stocks across Europe climb to modest gains, while markets that closed earlier in Asia were mostly down. Germany’s DAX gained 1.2%, Japan’s Nikkei 225 fell 0.6% and Hong Kong’s Hang Seng lost 2%.
On Wall Street, housing companies were strong on hopes that a less aggressive Fed could mean less pressure on mortgage rates. Homebuilder DR Horton gained 4.7%, PulteGroup rose 4.5% and Lennar rose 3.8%.
Cruise lines and other travel-related businesses also made big gains. Carnival rose 10.3% and American Airlines 4.2%.
Netflix, a once high-flying, high-growth stock that plunged to be this year’s worst in the S&P 500, rose 5.2% although it remains down nearly 60% for 2022.