US stocks rally as inflation data raise hopes of Fed rate cut

US stocks rally as inflation data raise hopes of Fed rate cut

U.S. stocks rallied and the dollar weakened on Tuesday as further signs of slowing inflation last month bolstered hopes that the Federal Reserve would slow the pace of its rate hikes.

Wall Street’s benchmark, the S&P 500, climbed 1.8% in early trading in New York, while the tech-heavy Nasdaq Composite climbed 2.6%. The S&P 500 has gained more than 14% since its October intraday low.

Tuesday’s gains followed a report showing U.S. producer prices rose 0.2% in October from September, compared to a Bloomberg poll expectation of 0.4%. The annual wholesale inflation rate was 8%, down sharply from 8.5% in September.

“These data are further confirmation of the current spike in inflation, evidence that we have been observing for months,” said Peter Boockvar, chief investment officer at Bleakley Financial Group.

The slowdown in the rate of increase in factory gate prices comes after a report last week showed that consumer inflation in the United States was also easing, raising hopes among some investors that the Fed would slow its tightening of monetary policy, which pushed the dollar higher and weighed on equities.

The dollar index, which tracks the currency against six others, fell 0.9%, continuing its decline from its peak in September. The euro, pound and yen all rose against the US currency.

US government bond markets rallied strongly – the yield on two-year US Treasury bills slipped 0.05 percentage points to 4.35%. The yield on the benchmark US 10-year note also fell 0.05 percentage points to 3.82%. Yields fall when prices rise.

However, some analysts believe investors have become unduly optimistic about recent gains in Wall Street stocks.

“Daily S&P 500 returns above 2% tend to be more common during bear markets,” said Goldman Sachs analysts, who said the recent rally in bonds and risky assets was “likely overblown.”

“The larger-than-expected inflation reset could support a slower pace of upside, but risks of an extended upside cycle remain,” the bank added.

Fed Vice Chair Lael Brainard said on Monday that a slower pace of interest rate hikes did not mean the central bank was slowing down its efforts to tackle historically high inflation.

“We have done a lot, but we have more work to do both to raise rates and maintain moderation to bring inflation down to 2% over time,” she said, adding that if the October’s better-than-expected inflation data was “reassuring”. , it was only “preliminary”.

Line chart of the US dollar index showing the dollar under pressure as risk sentiment returns

The debate over whether the latest rise in stocks is the start of a real bull run or just a bear rally is largely redundant in the absence of fresh economic news, argued chief trading officer Mike Zigmont. and research at Harvest Volatility Management.

“Let’s just accept that investors are confused, but they aren’t scared either,” Zigmont said. “They just had a huge dose of relief [from the latest CPI data] and now they are acclimatizing to the new environment.

Bank of America’s latest survey of global fund managers, meanwhile, found that 92% of respondents predicted a crisis of stagflation – low growth and high inflation – in 2023.

Asian markets also made solid gains after Xi Jinping and Joe Biden signaled their desire to improve US-China relations at a meeting on Monday ahead of the G20 summit in Indonesia, and Beijing moved to ease certain brakes on the pandemic.

Hong Kong’s Hang Seng index rose 4.1% and rose a quarter since its low in late October. China’s CSI 300 gained 1.9%, while Japan’s Topix rose 0.4% and South Korea’s Kospi gained 0.2%.

The regional Stoxx Europe 600 gained 0.3%, while London’s FTSE fell 0.3%.

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