Stocks jumped after a lighter-than-expected consumer prices report for November raised expectations that inflation is peaking.
The Dow Jones Industrial Average gained 623 points, or 1.8%, in a sudden move right after the inflation numbers hit. The S&P 500 added 2.5%, while the Nasdaq Composite rose 3.3%.
The consumer price index rose just 0.1% from the previous month, and increased 7.1% from a year ago,the Labor Department reported Tuesday. Economists surveyed by Dow Jones had been expecting a 0.3% monthly increase and a 7.3% 12-month increase. Excluding volatile food and energy prices, so-called core CPI rose 0.2% on the month and 6% on an annual basis, compared to respective estimates of 0.3% and 6.1%.
“That was a big surprise and markets are reacting accordingly,” said Steve Sosnick, chief strategist at Interactive Brokers. “Today is a day where the entire bullish scenario is working. Yields are lower on the inflationary story. Stocks love the story of a less restrictive Fed and the dollar is weaker which also helps stocks.”
Tuesday’s inflation report could play a key role in the Federal Reserve’s next rate-hiking decision expected at the conclusion of its two-day policy meeting on Wednesday. Traders are largely pricing in a 50-basis point increase, a slight decline from the previous four hikes. (1 basis point equals 0.01%.)
That expectation is unlikely to change because of Tuesday’s CPI report, however. The lighter numbers could mean the Fed doesn’t end up raising rates as high in the future, giving the economy a fighting chance to avoid a recession in 2023.
“Whether or not it influences Fed policy tomorrow is an open question,” added Sosnick. “A reaction like this is potentially saying this number will influence the Fed. If not their rate decision, which is probably 50 basis points, but maybe you get some movement on the outer months.”
The 10-year Treasury yield dropped nearly 15 basis points after the CPI report to below 3.5%. Tech shares, which have been hit the hardest from rising inflation and rates in 2022, led the gains Tuesday. Apple, Microsoft, Amazon and Alphabet all jumped more than 3%. Netflix also added 3%. Tesla gained nearly 3%.
Overall the gains were broad with most stocks in the green.