‘This is a big deal for macro markets’
Stocks soared Tuesday morning after U.S. data revealed inflation was lower than expected. Photo by REUTERS/Chip East U.S. 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 per cent and the Nasdaq 100 rose nearly 4 per cent after a key gauge of U.S. consumer prices posted the smallest monthly advance 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.
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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 favouring a quarter point hike as early as the Fed’s February meeting.
“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.”
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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 Quilter 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.
Bloomberg.com