Wall Street breathed a sigh of relief after a surprise slowdown in inflation spurred a stock rally and a plunge in bond yields, reinforcing bets the Federal Reserve is on track to keep cutting rates this year.
Equities — big and small — got a boost, with the S&P 500 up almost 2%. A surge in Treasuries pushed 10-year yields down by more than 10 basis points — quelling fears that a 5% rate for the benchmark bond would be on the horizon. The combined reaction in both markets is currently pointing to the best day for a consumer price index release since October 2023.
The US CPI rose in December by less than forecast, reinvigorating bets the Fed will cut rates sooner than previously thought. Swap traders are now back to fully pricing in a rate cut by July. That was a quick shift after hotter-than-estimated jobs data spurred bets the central bank would only be able to resume policy easing in September or October. Not to mention some wagers on hikes.
“The market will be encouraged by the decrease in core inflation, which should alleviate some of the pressure on stock and bond markets, both of which have had a poor start to the year on inflation fears and concerns the Fed would not only stop cutting interest rates, but could even reverse course and begin raising them,” said Chris Zaccarelli at Northlight Asset Management.
To Tina Adatia at Goldman Sachs Asset Management, while the latest CPI release is likely insufficient to put a January rate cut back on the table, it strengthens the case that the Fed’s cutting cycle has not yet run its course.
“With labor market data remaining robust, however, the Fed has scope to be patient and more good inflation data will be required for the Fed to deliver further easing,” she noted.
The S&P 500 rose 1.7%. The Nasdaq 100 climbed 2.1%. The Dow Jones Industrial Average added 1.6%. The Russell 2000 advanced 2.3%. The KBW Bank Index surged 3.7% as Citigroup Inc., Goldman Sachs Group Inc., Wells Fargo & Co. and JPMorgan Chase & Co. kicked off the earnings season.
The yield on 10-year Treasuries declined 13 basis points to 4.66%.
“Core inflation isn’t accelerating and that’s the story,” said Jamie Cox at Harris Financial Group. “The market may have had its hair on fire about inflation running away again, but the data do not support that conclusion.”
