Markets: Stocks climb after U.S. inflation report

New York –

Wall Street rose on Tuesday after a report showed that inflation cooled more than expected last month, raising the odds that the economy will avoid a recession.

The S&P 500 rose 1.6% in early trade, a gain from the previous day’s final hour on expectations for inflation data. The Dow Jones Industrial Average rose 284 points, or 0.8%, to 34,289 after nearly an hour of trading, while the Nasdaq Composite gained 2.5%. In addition to stocks, prices for everything from bonds to gold to bitcoin also rallied, although gains across the market moderated as the morning progressed.

Wall Street was relieved after data showed US inflation slowed to 7.1% last month from 7.7% in October and above 9% in the summer. While inflation remains painfully high and shoppers continue to pay far more than they did a year ago, Tuesday’s report offered hope that the worst of inflation is indeed over for the summer.

More importantly for markets, the slowdown has cemented investor expectations that the Fed can ease its aggressive pace of rate hikes.

This increase is intended to slow the economy, in the hope that cooling conditions will be sufficient to keep inflation in check. But they also have the potential to cause a recession if interest rates get too high, while they also depress the prices of stocks and various other investments. Smaller rate hikes mean less additional pain for the economy and markets.

Tuesday’s inflation report is the last data the Fed will get before announcing its next rate move on Wednesday. It was widely expected to raise its key overnight rate by 0.50 percentage point.

Typically, this increase will be significant as it is double the typical move. But that would be down from the four aggressive 0.75 percentage point hikes the Fed has approved since the summer as inflation retreats from the lowest level in generations.

Expectations of Fed easing meant the wildest action on Wall Street on Tuesday was in the bond market, with yields falling immediately after the inflation report.

The yield on the 10-year U.S. Treasury note, which helps set rates on mortgages and other important lending, fell to 3.46% from 3.62% late on Monday. The two-year yield, which is closer to the Fed’s expectations, plunged to 4.17% from 4.39%.

Other central banks around the world, including the European Central Bank, are also likely to raise their own rates by half a percentage point this week.

The inflation report was enough to change Wall Street’s mind, with many traders now betting the Fed’s key overnight rate will peak at 4.75% to 5% next year. Just a day earlier, most bets were on overnight rates rising to at least the 5% to 5.25% range. Those rates started this year at almost zero.

Still, expectations for a slowdown in rate hikes may disappoint some investors. Even if the Fed moves in smaller increments each time, it may still end up taking rates higher than the market expects.

Some investors also stayed on the move on expectations that the Federal Reserve would cut interest rates in the second half of 2023. Rate cuts typically work on steroids for stocks and other investments, but the Fed has been adamant it plans to keep rates high through the second half of 2023. Some time to ensure beating inflation.

Even if inflation is indeed falling, the global economy is still under threat from the rate hikes that have already been implemented. The real estate sector and other sectors that rely on low interest rates showed particular weakness, and there were widespread concerns about the strength of corporate profits.

Stocks gave up some of their early gains as analysts warned investors not to get carried away by Tuesday’s encouraging data. The S&P 500 gained 2.8% after the report, while the Dow more than halved its initial gain of 707 points.

Still, the overwhelming mood on Wall Street remained relieved, as economists called the inflation data “cool” in more ways than one.

Equity investors, a measure of how much they pay to protect against impending price swings, fell by more than 11 percent.


AP Business Writer Elaine Kurtenbach from Bangkok and AP Business Writer Matt Ott from Washington

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