STOCKS SOAR AS COOLING INFLATION RAISES HOPES
Wall Street has one of year’s best days; many bet on end to rate hikes
Relief washed over Wall Street on Tuesday, and stocks leaped to one of their best days of the year following a surprisingly encouraging report on inflation.
The S&P 500 jumped 1.9 percent for its best day since April and hit a two-month high. The Dow Jones Industrial Average rallied 489 points, or 1.4 percent, while the Nasdaq composite charged 2.4 percent higher.
The highly anticipated report showed not only that overall inf lation slowed last month, but so did a key underlying figure that economists see as a better indicator of future trends. The slowdown bolstered bets on Wall Street that inflation is cooling enough for the Federal Reserve to finally be done with its market-crunching hikes to interest rates.
Such hopes lifted all kinds of investments, and more than 90 percent of the stocks in the S&P 500 climbed in a widespread rally.
Technology and other highgrowth stocks tend to get some of the biggest boosts from easier rates, and a 2.3 percent rise for Amazon and 2.1 percent lift for Nvidia were two of the strongest forces pushing the S&P 500 upward.
Stocks of smaller companies also got a huge boost, with the Russell 2000 index of small stocks surging 5.4 percent for its best day in a year. Smaller companies are often seen as more dependent on borrowing cash to grow, which can make them more vulnerable to higher interest rates.
The inflation data helped to buoy Wall Street’s hopes that the Fed may actually pull off the balancing act of slowing the economy and hurting investment prices just enough to grind down inflation, but not so much as to cause a painful recession. That is still not a certainty, though.
The Fed has yanked its main interest rate to its highest level since 2001, up from virtually zero early last year, in hopes of grinding inflation lower. The moves have already sent shockwaves through the financial system, with stocks still down from their peak in early 2022 and several high-profile U.S. bank failures earlier this year shaking investors’ confidence.
Even if it doesn’t hike rates any more, the Fed has indicated plans to keep its main rate high for a while to ensure victory in its battle against inflation.
Still, Tuesday’s report was immensely encouraging for Wall Street. After the report’s release, Treasury yields in the bond market tumbled immediately as traders flooded into bets that the Fed won’t hike rates again.
Investors also pushed up the expected timetable for the Fed’s first cut to rates, which can act like steroids for financial markets and provide oxygen across the financial system. Many are betting on cuts to begin by the summer, though some economists say they likely won’t begin until the end of 2024.
The yield on the 10-year Treasury tumbled to 4.44 percent from 4.64 percent late Monday, which is a significant move for the bond market. Just a few weeks ago, the 10-year yield was above 5 percent and at its highest level since 2007.
Traders now see zero chance of a rate increase at the Fed’s next meeting next month, down from a 14.5 percent probability a day before, according to data from CME Group.
The prospect of no more rate hikes reverberated across all kinds of financial markets.
The value of the U.S. dollar fell against many other currencies, further slowing its strong run since the summer, while the price of gold rose $16.30 to settle at $1,966.50 per ounce. Higher rates tend to hurt gold because the metal looks less attractive as an investment when bonds are paying higher yields and gold continues to pay nothing.
Bank stocks were also strong on hopes that a halt to rate hikes will mean less pressure on the financial system. Zions Bancorp jumped 8.1 percent, and Comerica rose 7.8 percent.