(Bloomberg) — US stocks surged by the most in two years and Treasuries rallied after data showing prices rose slower than forecast fueled bets the Federal Reserve can dial back its aggressive tightening efforts.
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The S&P 500 rallied more than 4%in the biggest intraday gain since 2020 and poised for the best first-day reaction to a CPI report since 2008. Gains in the tech-heavy Nasdaq 100 topped 5%. The relief rally helped crypto markets stabilize despite the turmoil surrounding crypto exchange FTX.
Treasuries soared across the board, sending the rate on two-year notes, more sensitive to monetary policy, down 28 basis points. Rates traders pared bets on Fed hikes, with swaps indicating now that a 50-basis-point increase in December is far more likely than a 75-basis-point move.
Investors may treat the 7.7% headline figure as the latest evidence of peaking consumer-price growth, with potential to usher in an end to interest-rate hikes. The report also showed the consumer-price index coming in softer than expected on a month-on-month basis as well as in its core reading.
“The first downside surprise in inflation in several months will inevitably be received by an equity market ovation,” Seema Shah, chief global strategist at Principal Asset Management, wrote. A 0.5% hike, rather than 0.75%, in December is clearly on the cards but, until we have had a run of these types of CPI reports, a pause is still some way out.”
US Inflation Slows More Than Forecast, Gives Fed Downshift Room
Philadelphia Fed President Patrick Harker said he expects the central bank to slow the pace of interest-rate hikes in upcoming months as US monetary policy approaches restrictive levels. But, he noted Thursday in the text of his remarks to the Risk Management Association’s Philadelphia chapter, a “ hike of 50 basis points would still be significant.”
Fed Officials See Grounds for Soon Slowing Rate-Hike Pace
More reaction to CPI report
Rick Rieder, chief investment officer of global fixed income at BlackRock Financial Management Inc.:
“Today’s CPI report showed some moderate improvement as some of the previously elevated excessively high inflation-drivers, such as used cars, started to decline at a faster pace,” said Rick Rieder, chief investment officer of global fixed income at BlackRock Financial Management Inc.
Michael Landsberg, chief investment officer, Landsberg Bennett Private Wealth Management:
“We are preparing for an environment where interest rates remain higher for longer. Investors should be more concerned with the effect that rising rates into a decelerating economy has on their portfolio values rather than the current level of inflation.”
Max Gokhman, chief investment officer for AlphaTrAI:
“We expected that there would be deceleration of core goods prices, but seeing services slump too was a bigger bonus than any banker will get this year. That said, this won’t budge the Fed to rethink a 50bp hike in December, so traders curb their initial enthusiasm.”
Ipek Ozkardeskaya, senior analyst at Swissquote Bank:
“Hallelujah! We finally saw a strong beat in terms of inflation in the US. Both the headline and the core figures came lower than expected. And that helped softening the hawkish Fed expectations, pull the US dollar and the yields lower. The soft inflation has been a puff of fresh air for the entire market.”
Guillermo Hernandez Sampere, head of trading at asset manager MPPM GmbH:
“Pivot Party to start right now, short squeeze will ignite the rally. If the remaining cash comes to work we’ve seen the lows for a while.”
James Athey, investment director at Aberdeen Asset Management:
“Equities will love this and are likely to pick up the baton and keep running. Of course that may make the Fed uncomfortable at this early stage in the disinflation process and so watch out for Fedspeak if equities get too frothy.”
Key events this week:
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Fed officials Lorie Logan, Esther George, Loretta Mester speak at events, Thursday
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US University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
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The S&P 500 rose 4.3% as of 11:04 a.m. New York time
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The Nasdaq 100 rose 5.6%
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The Dow Jones Industrial Average rose 2.8%
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The Stoxx Europe 600 rose 2.6%
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The MSCI World index rose 3.6%
Currencies
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The Bloomberg Dollar Spot Index fell 1.8%
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The euro rose 1.6% to $1.0174
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The British pound rose 2.8% to $1.1677
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The Japanese yen rose 3.3% to 141.63 per dollar
Cryptocurrencies
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Bitcoin rose 11% to $17,481.5
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Ether rose 19% to $1,312.71
Bonds
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The yield on 10-year Treasuries declined 26 basis points to 3.84%
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Germany’s 10-year yield declined 19 basis points to 1.99%
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Britain’s 10-year yield declined 20 basis points to 3.25%
Commodities
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West Texas Intermediate crude rose 0.9% to $86.57 a barrel
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Gold futures rose 2.4% to $1,754.20 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Richard Henderson, Srinivasan Sivabalan, Isabelle Lee, Vildana Hajric, Peyton Forte, Sagarika Jaisinghani, Macarena Muñoz, Farah Elbahrawy, Emily Graffeo and Lu Wang.
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