US stocks shot higher and Treasuries rallied on Thursday after October’s closely watched inflation data came in cooler than expected, setting the stage for lower Federal Reserve rate rises.
Wall Street’s benchmark S&P 500 added 4.3 per cent in afternoon trading in New York, while the tech-heavy Nasdaq Composite jumped 5.8 per cent.
In government bond markets, the yield on the two-year Treasury, which is particularly sensitive to interest rate moves, slipped 0.3 percentage points to 4.32 per cent. The yield on the 10-year Treasury fell 0.28 percentage points to 3.86 per cent. Yields fall when prices rise.
The bounce in markets came after the US consumer price index reading for October came in at 7.7 per cent, marking the smallest 12-month increase since January and a sharp drop in the annual rate of inflation of 8.2 per cent in September. Economists had forecast an 8 per cent rise.
The core CPI reading, which excludes food and energy prices, landed at 6.3 per cent year on year, below expectations of 6.5 per cent and September’s reading of 6.6 per cent.
The dollar fell immediately after the CPI report, trading down 1.4 per cent against a basket of six peers.
The lower than expected readings ease pressure on the Fed to maintain its policy of aggressive interest rate rises to combat inflation. The central bank has delivered four consecutive rises of 0.75 percentage points this year to slow price growth.
Fed chair Jay Powell signalled earlier this month that the central bank would slow the pace of monetary tightening but arrive at a higher than expected terminal rate.
Former US Treasury secretary Lawrence Summers earlier this week said the terminal rate could hit “6 [per cent] or more”. But markets now expect the Fed’s benchmark interest rate to peak at around 4.8 per cent in May 2023, having previously predicted a peak of just over 5 per cent in June.
The CPI numbers “will be a catalyst, I think we’ll have a pretty good market rally to the end of the year,” said Jim Paulsen, chief investment strategist at the Leuthold Group.
“The fact the Fed may slow down from here means what could break out is a conversation not just about recession rather than inflation, but a conversation about maybe avoiding a recession entirely,” said Paulsen. “Maybe we’ll have a soft landing.”
Analysts at JPMorgan said the latest CPI figures supported the view that “a decent amount of the inflation” over the past year “will prove to be temporary or transitory”, reviving a word that Powell was mocked for using to describe inflation this time last year.
Traders are also assessing the incoming results of this week’s midterm elections. One day after polls closed, elections in multiple states were yet to be called, leaving control of both the Senate and House up in the air. However, analysts said the Republican party’s showing so far had already undermined pollster predictions of a “red wave” in both legislative chambers.
In Asia on Thursday, Japan’s Topix shed 0.7 per cent, the Hang Seng index in Hong Kong fell 1.7 per cent and China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks fell 0.7 per cent.
Europe’s Stoxx 600 added 2.7 per cent and London’s FTSE gained 1.1 per cent.