(Bloomberg) — Wall Street breathed a sigh of relief after a sudden slowdown in inflation sent stocks higher and bond yields lower, boosting bets that the Federal Reserve is on track to continue cutting interest rates this year.
Stocks erased their losses for 2025, with the S&P 500 rising about 2% in its biggest gain since the aftermath of the US election. The rise in Treasuries sent 10-year yields down about 15 basis points – alleviating fears that a 5% interest rate is on the horizon. Commodity prices rose, with oil reaching $80 per barrel. The coordinated advance across assets was the best CPI day since at least late 2023, according to data compiled by Bloomberg.
The US consumer price index rose less than expected in December, revitalizing bets that the Federal Reserve will cut interest rates sooner than previously thought. Swap traders returned to fully pricing in rate cuts by July. It was a quick turnaround after Friday’s jobs data prompted officials to bet they would be able to resume policy easing only in September or October. Not to mention the bets on hiking.
“Extreme sentiment led to a strong post-CPI move,” said Steve Sosnick of Interactive Brokers. “Today’s rises in stocks and bonds were directly driven by a better-than-expected month-on-month core CPI reading, but the magnitude of the rises reflects the tense sentiment prevailing in the markets.”
For Tina Adatia of Goldman Sachs Asset Management, while the latest CPI release is unlikely to be enough to put a January rate cut on the table, it strengthens the argument that the Fed’s cutting cycle has not yet run its course. .
“The market will be encouraged by lower core inflation, which should relieve some of the pressure on equity and bond markets, both of which have had a poor start to the year due to inflation concerns and concerns that the Fed won’t just stop cutting rates,” said Chris Zaccarelli of Northlight Asset Management: “Interest rates, however, could reverse course and start raising them.”
The Standard & Poor’s 500 rose 1.8%. The Nasdaq 100 index rose 2.3%. The Dow Jones Industrial Average rose 1.7%. Bloomberg’s “Magnificent Seven” gauge of giant companies rose 3.7%. The Russell 2000 advanced 2%. The KBW Bank Index rose 4.1% at the start of Citigroup Inc.’s earnings season. and Goldman Sachs Group Inc. and Wells Fargo & Co. and JPMorgan Chase & Co.
As risk-takers resurface, the market’s “fear gauge” – the VIX – has collapsed the most this year. Goldman Sachs, which includes loss-making technology companies, jumped 3.2%, while a group of best-selling stocks added 3.8%. Bitcoin is hovering near $100,000.
The yield on the 10-year Treasury note fell by 14 basis points to 4.65%. The Bloomberg Dollar Spot Index fell 0.2%. The price of oil remained high even after news that Israel and Hamas had agreed to a ceasefire agreement, leading to at least a temporary halt to the war in Gaza.
At the very least, the latest inflation numbers are causing some short covering, according to Steve White of BOK Financial.
“The market is relieved that potential interest rates – for now – have been taken off the table and that the bond market will not limit the massive rally we have seen over the past couple of years in equity markets,” John said. Kirchner at Janus Henderson Investors.
At Evercore, Krishna Guha says the CPI reading reinforces the view that the market has “overtraded” the inflation story since the start of the year due to limited new information – and should be risk-on.
This “reinforces the base case for a two-fold Fed cut, and keeps the door open to the possibility of a rate cut in March,” he noted.
For Ellen Zentner of Morgan Stanley Wealth Management, Wednesday’s CPI won’t change expectations about a pause later this month, but it should dampen some of the talk about the Fed potentially raising interest rates.
“Judging by the initial market response, investors appear to be relieved after a few months of difficult inflation readings.”
Rajeev Sharma of Key Wealth said the data actually provided a sigh of relief for markets after it came in largely in line with expectations.
“However, the upcoming inflation data is not enough good news for the Fed to forget about the strength of the labor market and, therefore, should not be enough for the market to start anticipating a larger number of interest rate cuts for 2025,” Sharma said. male.
The so-called core CPI – which excludes food and energy costs – rose 0.2% in December. This was the first decline in the rate in six months. Compared to last year, it increased by 3.2%. This is still above the Fed’s target of 2%.
“We still think it would be easy for the Fed to remain on hold for now and wait for more data and fiscal policy clarity,” said Alison Boxer of Pacific Investment Management. “We expect this to be the message Chairman Jerome Powell aims to communicate at the January meeting.”
The Fed’s beige book indicates slight to moderate growth at the end of the year
After months of rising, easing in the CPI is helping reignite talk of a resumption of progress in inflation – but officials will need to see a string of weak readings to be convinced. Continued price pressures contributed to a deep sell-off in global bond markets and stoked fears that the Federal Reserve eased policy too quickly at the end of last year.
New York Fed President John Williams expressed confidence that inflation would continue to decline, without offering any hints about the timing of additional cuts. His Richmond counterpart Tom Parkin said the new data shows continued progress in lowering inflation, but rates should remain restrained. Austan Goolsbee, president of the Federal Reserve Bank of Chicago, pointed to the data as supporting his expectations for easing price pressures.
“For the Fed, this is certainly not enough to prompt a January cut,” said Seema Shah, chief global strategist at Principal Asset Management. “However, if today’s reading is accompanied by another weak CPI reading next month as well as weakness in payrolls, a March rate cut could be back on the table.”
Shah also noted that perhaps the key takeaway is that markets are likely to be “rocked” over the next few data releases as investors seek a narrative they can be comfortable with for more than just a few days at a time.
Fed cuts remain on the table as inflation is expected to moderate over the coming months, said Soletta Marcelli, of UBS Global Wealth Management.
She pointed out that “the strength of the economy remains a factor supporting the growth of corporate profits at the current level of revenues.” “While volatility may make for an uncomfortable ride before the S&P 500 reaches our year-end target of 6,600, we expect the bull market to continue and maintain our ‘attractive’ rating for U.S. stocks.”
At Nationwide, Mark Hackett says encouraging inflation data is “keeping the bulls off the sidelines.”
“Stock investors have become increasingly sensitive to movements in the bond market, with a heavy focus on interest rates, inflation and Fed policy,” Hackett said. “The focus will now turn to earnings, which have been a headwind in recent quarters, as we entered earnings season with elevated expectations. Given the weakness over the past month, the odds of a positive surprise this earnings season have improved.”
The most prominent features of the company:
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Goldman Sachs Group Inc. Previous estimates its stock traders had their best year ever.
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JPMorgan Chase & Co. traders posted their biggest fourth-quarter gains on record, boosted by volatility linked to the US elections in November.
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Citigroup Inc. said it would buy back $20 billion worth of its shares in the coming years — unleashing billions in excess capital the bank had been holding in order to meet a key demand from shareholders.
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Wells Fargo & Co.’s expenses fell 12% in the fourth quarter as CEO Charlie Scharf continues to trim staff as part of broader efforts to cut costs and reshape the bank. The company’s shares rose.
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BlackRock has attracted an annual record $641 billion in client funds, underscoring the firm’s global reach across increasingly public and private assets as it integrates multibillion-dollar acquisitions and reshapes its leadership.
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Bank of New York Mellon Corp.’s fourth-quarter earnings beat analysts’ expectations after higher long-term interest rates boosted margins.
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The US Department of Transportation has sued Southwest Airlines for violating rules that require airlines to set realistic flight schedules and meet them.
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The merger of CBS owner Paramount Global with film and TV production company Skydance Media should be reviewed by federal authorities because of the involvement 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. agreed. on the sale of a group of cloud software assets it acquired in recent years to Thoma Bravo-backed Flexera.
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Engine problems affecting many of its narrow-body planes will continue into the first half of the year and possibly beyond, Airbus SE CEO Guillaume Faury said, complicating the European planemaker’s outlook as it grapples with ongoing supply chain constraints.
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Pfizer Inc sold about 700 million shares in Haleon Plc, trimming its stake in toothpaste maker Sensodyne.
Main events this week:
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The European Central Bank releases its December policy meeting account on Thursday
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Bank of America and Morgan Stanley earnings on 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 consumer price index, Friday
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US housing construction begins, industrial production, Friday
Some key movements in the markets:
Stocks
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The S&P 500 was up 1.8% as of 4pm New 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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MSCI World Index rises 1.7%
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The Bloomberg Magnificent 7 Total Return Index rose 3.7%.
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The Russell 2000 rose 2%.
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The 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 percent to $1.0296
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The British pound rose 0.2 percent to $1.2242
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The Japanese yen rose 1 percent to 156.45 yen to the dollar
Cryptocurrencies
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Bitcoin rose 3.3% to $99,583.06
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Ethereum rose 6.8% to $3,434.38
Bonds
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The yield on the 10-year Treasury note fell 14 basis points to 4.65%.
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The yield on German 10-year bonds fell by nine basis points to 2.56%.
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The yield on British 10-year bonds fell by 16 basis points to 4.73%.
Goods
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West Texas Intermediate crude rose 3.9% to $80.53 per barrel
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Spot gold rose 0.7 percent to $2,696.67 per ounce
This story was produced with assistance from Bloomberg Automation.
-With assistance from Lu Wang, Natalia Knyazevich, Sujata Rao, Margarita Kirakosyan, Julian Ponthus, and Winnie Hsu.
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