Wall Street welcomed a surprise slowdown in inflation, igniting a rally across equities and bonds while boosting market confidence that the Federal Reserve remains on track to reduce interest rates further this year. The S&P 500 gained nearly 2%, marking its most significant one-day jump since the aftermath of the 2024 U.S. elections, as fears of persistent high rates eased. The 10-year Treasury yield dropped by almost 15 basis points, alleviating concerns of a 5% benchmark rate, while commodities like oil surged past $80 a barrel.
This broad-based market rally followed the U.S. Consumer Price Index (CPI) report, which revealed slower-than-expected inflation in December. The core CPI, which excludes volatile food and energy costs, rose just 0.2% month-over-month—the first deceleration in six months—and climbed 3.2% from the previous year, still above the Federal Reserve’s 2% target.
Markets React to Lower Inflation
The easing inflation figures spurred optimism, with investors speculating that the Fed may begin cutting rates sooner than anticipated. Swap traders are now fully pricing in a rate cut by July, reflecting a sharp pivot from last sentiment, which expected easing to resume in September or October.
“Extreme sentiment led to a powerful post-CPI move,” said Steve Sosnick of Interactive Brokers. “Today’s rallies in stocks and bonds were driven by better-than-expected inflation data, but the market’s reaction also reflects the nervous sentiment that has dominated.”
Equities and Bonds Rally
Major indexes posted significant gains. The Nasdaq 100 rose 2.3%, while the Dow Jones Industrial Average advanced 1.7%. A Bloomberg index tracking the “Magnificent Seven” tech megacaps jumped 3.7%, and the Russell 2000 climbed 2%. Financial stocks also surged, with the KBW Bank Index gaining 4.1%, buoyed by strong performances from major players like Citigroup and JPMorgan Chase as earnings season kicked off.
As risk appetite returned, the VIX volatility index recorded its steepest drop this year. Meanwhile, speculative assets showed strength, with a Goldman Sachs index of loss-making tech firms rising 3.2% and heavily shorted stocks gaining 3.8%.
Treasury yields fell sharply, with the 10-year yield settling at 4.65%. The Bloomberg Dollar Spot Index dipped 0.2%, while Bitcoin hovered near $100,000.
Analysts Caution Against Overreaction
While the inflation data bolstered hopes of Fed easing, experts urged caution. “The market is relieved that nose-bleed interest rates are off the table for now, but it’s premature to assume the Fed will aggressively cut rates,” said John Kerschner of Janus Henderson Investors.
Ellen Zentner at Morgan Stanley added, “This CPI report won’t alter expectations for the Fed to pause later this month, but it does ease fears of a potential rate hike.”
Despite the positive CPI report, lingering price pressures and a strong labor market remain key concerns for the Fed. Officials like Austan Goolsbee, president of the Chicago Fed, noted the progress in curbing inflation but emphasized the need for sustained improvements.
Outlook for Fed Policy
The market’s response underscores growing confidence in a near-term Fed pivot. Evercore’s Krishna Guha remarked that the CPI report “reinforces the base case for two Fed cuts this year and leaves the door open for a March cut.” However, sustained progress in inflation data and weaker job numbers will be necessary to cement that outlook.
Solita Marcelli of UBS Global Wealth Management remains optimistic, suggesting that moderating inflation and a strong economy could fuel continued equity gains. “While volatility may persist, we expect the S&P 500 to reach our year-end target of 6,600,” she said.
Earnings Season in Focus
As inflation fears subside, investor attention shifts to corporate earnings. “Earnings season has arrived with elevated expectations,” said Mark Hackett of Nationwide. “Given the recent weakness in equities, the chances of positive surprises are higher, potentially providing a much-needed boost to markets.”
In conclusion, while the latest CPI figures offer relief, the Federal Reserve’s future actions will hinge on a series of forthcoming data releases. Markets may remain volatile as investors seek clarity, but optimism around rate cuts and easing inflation suggests brighter days ahead for Wall Street.
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