(Bloomberg) -- Stocks are headed for the best post-inflation day rally in more than a decade as slower-than-projected price growth sparked bets the Federal Reserve can downshift its aggressive rate-hike path.
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More than 90% of stocks in the S&P 500 were swept up in the rally that left the benchmark poised for the best first-day reaction to a CPI report since 2008. The relief rally caught short-sellers wrong-footed, helping spur the outsized gains. The sentiment shift also helped crypto markets stabilize despite the turmoil surrounding crypto exchange FTX.
Headline inflation came in at 7.7%, the lowest since January, before Russia’s war in Ukraine pushed up commodity prices. More important for the Fed, the core measure that excludes food and energy slowed more anticipated.
The bounce in equities comes as the Fed’s tightening has hammered risk assets all year. The S&P 500 is still down almost 18% and the Nasdaq 100 is off nearly 30%.
Treasuries soared, sending the rate on two-year notes, more sensitive to monetary policy, down 28 basis points. Rates traders pared bets on Fed hikes, with swaps now indicating a 50-basis-point increase in December is far more likely than a 75-basis-point move.
“The first downside surprise in inflation in several months will inevitably be received by an equity market ovation,” Seema Shah, chief global strategist at Principal Asset Management, wrote. “A 0.5% hike, rather than 0.75%, in December is clearly on the cards but, until we have had a run of these types of CPI reports, a pause is still some way out.”
Fed officials appeared to back a downshift in rate hikes after a stretch of four jumbo-sized increases. They also stressed the need for policy to remain tight.
Dallas Fed President Lorie Logan said it may soon be appropriated to slow the pace to better assess economic conditions. San Francisco’s Mary Daly said the moderation was “good news,” but noted “one month of data does not a victory make.” She also said “pausing is not the discussion, the discussion is stepping down.”
Swaps markets pulled back bets on a peak rate to slightly less than 4.9% in the first half of next year, from more 5% before the CPI data.
Market reaction to CPI report
Rick Rieder, chief investment officer of global fixed income at BlackRock Financial Management Inc.:
“Today’s CPI report showed some moderate improvement as some of the previously elevated excessively high inflation-drivers, such as used cars, started to decline at a faster pace.”
Michael Landsberg, chief investment officer, Landsberg Bennett Private Wealth Management:
“We are preparing for an environment where interest rates remain higher for longer. Investors should be more concerned with the effect that rising rates into a decelerating economy has on their portfolio values rather than the current level of inflation.”
Max Gokhman, chief investment officer for AlphaTrAI:
“We expected that there would be deceleration of core goods prices, but seeing services slump too was a bigger bonus than any banker will get this year. That said, this won’t budge the Fed to rethink a 50bp hike in December, so traders curb their initial enthusiasm.”
Ipek Ozkardeskaya, senior analyst at Swissquote Bank:
“Hallelujah! We finally saw a strong beat in terms of inflation in the US. Both the headline and the core figures came lower than expected. And that helped softening the hawkish Fed expectations, pull the US dollar and the yields lower. The soft inflation has been a puff of fresh air for the entire market.”
Guillermo Hernandez Sampere, head of trading at asset manager MPPM GmbH:
“Pivot Party to start right now, short squeeze will ignite the rally. If the remaining cash comes to work we’ve seen the lows for a while.”
James Athey, investment director at Aberdeen Asset Management:
“Equities will love this and are likely to pick up the baton and keep running. Of course that may make the Fed uncomfortable at this early stage in the disinflation process and so watch out for Fedspeak if equities get too frothy.”
Key events this week:
US University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
The S&P 500 rose 4.7% as of 2:08 p.m. New York time
The Nasdaq 100 rose 6.3%
The Dow Jones Industrial Average rose 3.2%
The MSCI World index rose 3.8%
Currencies
The Bloomberg Dollar Spot Index fell 1.7%
The euro rose 1.5% to $1.0162
The British pound rose 2.7% to $1.1663
The Japanese yen rose 3.1% to 141.99 per dollar
Cryptocurrencies
Bitcoin rose 11% to $17,410.5
Ether rose 15% to $1,275.93
Bonds
The yield on 10-year Treasuries declined 25 basis points to 3.85%
Germany’s 10-year yield declined 16 basis points to 2.01%
Britain’s 10-year yield declined 16 basis points to 3.29%
Commodities
West Texas Intermediate crude rose 1.3% to $86.98 a barrel
Gold futures rose 2.4% to $1,754.30 an ounce
This story was produced with the assistance of Bloomberg Automation.
--With assistance from Peyton Forte, Sagarika Jaisinghani, Macarena Muñoz, Farah Elbahrawy, Emily Graffeo, Lu Wang, Richard Henderson, Srinivasan Sivabalan, Isabelle Lee and Vildana Hajric.
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