US Stocks Soar, Bonds Rally After Soft CPI Data: Markets Wrap

(Bloomberg) — US stocks soared and yields on Treasuries tumbled across the curve after data showed prices rose less than forecast last month, cementing optimism the Federal Reserve will slow the pace of rate increases.

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The S&P 500 jumped more than 2% and the Nasdaq 100 rose nearly 4% after a key gauge of US consumer prices posted the smallest monthly advanced in more than a year. The policy-sensitive two-year Treasury yield sank more than 15 basis points. The greenback halted a two-day rally.

Tuesday’s data, taken with the slower-than-projected CPI print in the prior month, validates the Fed’s projected half-point move on Wednesday and sets the tone for future rate decisions. The swap markets also trimmed their rate-hike wagers, with the odds now favoring a quarter point hike as early as the Fed’s February meeting.

Read More: US Core CPI Posts Smallest Monthly Increase in More Than a Year

“For the second consecutive month, inflation came in below expectations. This is good news for markets and the Federal Reserve,” said Phillip Neuhart, director of market and economic research for First Citizens Bank Wealth Management. “Should this downtrend persist, it allows the Fed to slow the pace of interest rate hikes and eventually pause in the first half of next year.”

Investors didn’t think inflation was going to come down as fast as economists were forecasting, but now it’s coming down even faster, Morgan Stanley strategist Matthew Hornbach tells Bloomberg TV.

“This is a big deal for macro markets,” Hornbach said. “It’s a big deal for the outlook in 2023.”

Still, some investors are approaching the CPI surprise cautiously.

“While the war against inflation is turning, we are a long way off declaring victory and the Fed will keep its hawkish stance for a while longer, even if it does potentially force a recession,” said Richard Carter, head of fixed interest research at Quilting Cheviot.

Following the Fed, the European Central Bank will announce its rate decision Thursday. Markets will also contend with decisions from the Bank of England and monetary authorities in Mexico, Norway, the Philippines, Switzerland and Taiwan.

Key events this week:

  • FOMC rate decision and Fed Chair news conference, Wednesday

  • China medium-term lending, property investment, retail sales, industrial production, surveyed jobless, Thursday

  • ECB rate decision and ECB President Lagarde briefing, Thursday

  • Rate decisions for UK BOE, Mexico, Norway, Philippines, Switzerland, Taiwan, Thursday

  • US cross-border investment, business inventories, empire manufacturing, retail sales, initial jobless claims, industrial production, Thursday

  • Eurozone S&P Global PMI, CPI, Friday

Some of the main moves in markets:

Inventory

  • The S&P 500 rose 2.6% as of 9:30 am New York time

  • The Nasdaq 100 rose 3.7%

  • The Dow Jones Industrial Average rose 2.1%

  • The Stoxx Europe 600 pink 2%

  • The MSCI World index rose 0.5%

Currencies

  • The Bloomberg Dollar Spot Index fell 1.2%

  • The euro rose 1.2% to $1.0661

  • The British pound rose 1.3% to $1.2428

  • The Japanese yen rose 2% to 134.88 per dollar

Cryptocurrencies

  • Bitcoin rose 4.2% to $17,906.95

  • Pink Ether 5% to $1,338.5

Leaps

  • The yield on 10-year Treasuries declined 17 basis points to 3.44%

  • Germany’s 10-year yield declined seven basis points to 1.86%

  • Britain’s 10-year yield advanced three basis points to 3.23%

Commodities

  • West Texas Intermediate crude rose 2.4% to $74.93 a barrel

  • Gold futures rose 2.2% to $1,831 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Natalia Kniazhevich, Reade Pickert and Michael Msika.

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