(Bloomberg) — Wall Street breathed a sigh of relief after a surprise slowdown in inflation spurred a stock rally and a plunge in bond yields, reinforcing bets the Federal Reserve is on target to maintain cutting rates this yr.
Equities erased their losses for 2025, with the S&P 500 up about 2% in its biggest gain because the aftermath of the US election. A surge in Treasuries pushed 10-year yields down by almost 15 basis points — easing fears that a 5% rate can be on the horizon. Commodities roared, with oil topping $80 a barrel. The concerted cross-asset advance was the perfect for a consumer price index day since not less than late 2023, in keeping with data compiled by Bloomberg.
The US CPI rose in December by lower than forecast, reinvigorating bets the Fed will slash rates earlier than previously thought. Swap traders are back to completely pricing in a rate cut by July. That was a fast shift after Friday’s jobs data spurred bets officials would only find a way to resume policy easing in September or October. Not to say the wagers on hikes.
“Extreme sentiment led to a strong post-CPI move,” said Steve Sosnick at Interactive Brokers. “The proximate explanation for today’s rallies in stocks and bonds was a better-than-expected month-over-month core CPI reading, however the magnitude of the rallies reflected the jittery sentiment that had pervaded markets.”
To Tina Adatia at Goldman Sachs Asset Management, while the most recent CPI release is probably going insufficient to place a January rate in the reduction of on the table, it strengthens the case that the Fed’s cutting cycle has not yet run its course.
“The market might be encouraged by the decrease in core inflation, which should alleviate among the pressure on stock and bond markets, each of which have had a poor begin to the yr on inflation fears and concerns the Fed wouldn’t only stop cutting rates of interest, but could even reverse course and start raising them,” said Chris Zaccarelli at Northlight Asset Management.
The S&P 500 rose 1.8%. The Nasdaq 100 climbed 2.3%. The Dow Jones Industrial Average added 1.7%. A Bloomberg gauge of the “Magnificent Seven” megacaps rallied 3.7%. The Russell 2000 advanced 2%. The KBW Bank Index surged 4.1% as Citigroup Inc., Goldman Sachs Group Inc., Wells Fargo & Co. and JPMorgan Chase & Co. kicked off the earnings season.
As risk takers resurfaced, the market’s “fear gauge” — the VIX — collapsed probably the most this yr. A Goldman Sachs basket of money-losing tech firms jumped 3.2%, while a bunch of most-shorted shares added 3.8%. Bitcoin hovered near $100,000.
The yield on 10-year Treasuries declined 14 basis points to 4.65%. The Bloomberg Dollar Spot Index fell 0.2%. Oil remained higher even after news that Israel and Hamas agreed to a ceasefire deal, bringing not less than a short lived halt to the war in Gaza.
On the very least, the most recent inflation figures are causing some short covering, in keeping with Steve Wyett at BOK Financial.
“The market is relieved that potential ‘nose-bleed’ rates of interest are — for now — taken off the table and the bond market won’t curtail the huge run we’ve seen over the past two years within the equity markets,” said John Kerschner at Janus Henderson Investors.
At Evercore, Krishna Guha says the CPI print reinforces the view that the market has “overtraded” the inflation story because the start of the yr on limited recent information — and must be risk-on.
“It reinforces the bottom case for 2 Fed cuts, and keeps open the potential for a March cut,” he noted.
To Ellen Zentner at Morgan Stanley Wealth Management, Wednesday’s CPI won’t change expectations for a pause later this month, however it should curb among the talk in regards to the Fed potentially raising rates.
“And judging by the market’s initial response, investors appeared to feel a way of relief after a couple of months of stickier inflation readings.”
Indeed, the info provides a sigh of relief for the markets after coming in largely aligned with expectations, said Rajeev Sharma at Key Wealth.
“Nonetheless, inflation data coming in line will not be enough excellent news for the Fed to forget the strength of the job market and, in turn, shouldn’t be enough for the market to start out anticipating a bigger variety of rate cuts for 2025,” Sharma noted.
The so-called core consumer price index — which excludes food and energy costs — increased 0.2% in December. That marked the primary stepdown in the speed in six months. From a yr ago, it rose 3.2%. That’s still above the Fed’s 2% goal.
“We still think that it’ll be easy for the Federal Reserve to stay on hold for now and wait for more data and monetary policy clarity,” said Allison Boxer at Pacific Investment Management Co. “We expect this to be the message Chair Jerome Powell goals to speak on the January meeting.”
Fed’s Beige Book Points to Slight to Moderate Growth at Yr-End
After months of elevated prints, the easing within the CPI helps restart the conversation that inflation progress has resumed — but officials might want to see a series of subdued readings to be convinced. Lingering price pressures have contributed to a deep selloff in global bond markets and fueled concerns that the Fed eased policy too quickly at the top of last yr.
Fed Bank of Recent York President John Williams voiced confidence that inflation would proceed to recede, without offering any hints on the timing of additional cuts. His Richmond counterpart Tom Barkin said fresh data show continued progress on lowering inflation, but that rates should remain restrictive. Austan Goolsbee, president of the Chicago Fed, pointed to the info as supporting his outlook for alleviating price pressures.
“For the Fed, that is definitely not enough to prompt a January cut,” said Seema Shah, chief global strategist at Principal Asset Management. “But, if today’s print were accompanied by one other soft CPI print next month plus a weakening in payrolls, then a March rate cut may even be back on the table.”
Shah also noted that perhaps the important thing takeaway is that markets are prone to be “whipsawed” over the subsequent few data releases as investors seek a narrative that they may be comfortable with for greater than just a couple of days at a time.
To Solita Marcelli at UBS Global Wealth Management, Fed cuts are still on the table as inflation should moderate over the approaching months.
“The strength of the economy stays a supporting factor for corporate earnings growth at the present level of yields,” she noted. “While volatility could make it an uncomfortable journey before the S&P 500 hits our year-end goal of 6,600, we expect the equity bull market to proceed and maintain our ‘attractive’ rating on US equities.”
At Nationwide, Mark Hackett says the encouraging inflation data is “bringing bulls off the sidelines.”
“Equity investors have turn into increasingly sensitive to moves within the bond market, with an intense give attention to rates, inflation, and Fed policy,” said Hackett. “Focus will now shift to earnings, which has been a headwind in recent quarters, as we now have entered earnings season with elevated expectations. Given the weakness over the past month, the percentages for a positive surprise this earnings season have improved.”
Corporate Highlights:
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Goldman Sachs Group Inc. cruised past estimates as its equity traders delivered their best yr on record.
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JPMorgan Chase & Co.’s traders scored their biggest fourth-quarter haul ever, boosted by volatility tied to the US elections in November.
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Citigroup Inc. said it’ll repurchase $20 billion price of its stock in the approaching years — unleashing billions of excess capital the bank had been keeping available so as to meet a key ask from shareholders.
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Wells Fargo & Co.’s expenses dropped 12% within the fourth quarter as Chief Executive Officer Charlie Scharf continues to whittle headcount as a part of broader efforts to slash costs and remake the bank. The corporate’s shares rose.
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BlackRock Inc. attracted an annual record of $641 billion in client money, underlining the firm’s global reach across public and, increasingly, private assets because it integrates multibillion-dollar acquisitions and reshapes its leadership.
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Bank of Recent York Mellon Corp.’s fourth-quarter profit topped analyst expectations after higher-for-longer rates of interest boosted margins.
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Southwest Airlines Co. was sued by the US Transportation Department for allegedly violating rules that require airlines to set and meet realistic flight schedules.
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CBS owner Paramount Global’s merger with film and TV producer Skydance Media must be reviewed by federal authorities due to participation of China’s Tencent Holdings Ltd., which was recently added to a US military blacklist, a key member of Congress said.
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NetApp Inc. has agreed to sell a portfolio of cloud software assets it acquired in recent times to Thoma Bravo-backed Flexera.
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Airbus SE Chief Executive Officer Guillaume Faury said the engine issues afflicting a lot of its narrowbody aircraft will proceed into the primary half of the yr and possibly beyond, complicating the European planemaker’s outlook because it grapples with persevered supply-chain constraints.
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Pfizer Inc. sold about 700 million shares in Haleon Plc, further paring its stake within the maker of Sensodyne toothpaste.
Key events this week:
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ECB releases account of December policy meeting, Thursday
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Bank of America, Morgan Stanley earnings, Thursday
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US initial jobless claims, retail sales, import prices, Thursday
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China GDP, property prices, retail sales, industrial production, Friday
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Eurozone CPI, Friday
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US housing starts, industrial production, Friday
A few of the essential moves in markets:
Stocks
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The S&P 500 rose 1.8% as of 4 p.m. Recent York time
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The Nasdaq 100 rose 2.3%
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The Dow Jones Industrial Average rose 1.7%
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The MSCI World Index rose 1.7%
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Bloomberg Magnificent 7 Total Return Index rose 3.7%
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The Russell 2000 Index rose 2%
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KBW Bank Index rose 4.1%
Currencies
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The Bloomberg Dollar Spot Index fell 0.2%
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The euro fell 0.1% to $1.0296
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The British pound rose 0.2% to $1.2242
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The Japanese yen rose 1% to 156.45 per dollar
Cryptocurrencies
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Bitcoin rose 3.3% to $99,583.06
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Ether rose 6.8% to $3,434.38
Bonds
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The yield on 10-year Treasuries fell 14 basis points to 4.65%
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Germany’s 10-year yield declined nine basis points to 2.56%
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Britain’s 10-year yield declined 16 basis points to 4.73%
Commodities
This story was produced with the help of Bloomberg Automation.
–With assistance from Lu Wang, Natalia Kniazhevich, Sujata Rao, Margaryta Kirakosian, Julien Ponthus and Winnie Hsu.
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