Inflation Slows, Boosting Stock Market Rally

US labor market

US stock markets soared on Wednesday, mirroring a global rally sparked by unexpectedly positive inflation data.

By midday, the S&P 500 had climbed 1.1%, poised to build upon its record high from the previous day. The Dow Jones Industrial Average gained 270 points, or 0.7%, while the Nasdaq composite surged by 1.6%.

The bond market witnessed an even more pronounced response, with Treasury yields plummeting after the report revealed that U.S. consumer prices had increased by 3.3% over the past year, slightly below the 3.4% economists had predicted.

For Wall Street, a moderation in inflation is not only beneficial for American households grappling with rising prices, but also enhances the likelihood of the Federal Reserve reducing its benchmark interest rate. Such a move would alleviate economic pressure and stimulate investment prices.

Following the release of inflation figures, various assets, including Bitcoin, gold, and copper, experienced rallies. A gauge of investor anxiety in U.S. stocks also eased.

While the Federal Reserve is not expected to cut interest rates at its current meeting, concluding Wednesday afternoon, it has emphasized the need for consistent data demonstrating inflation’s descent towards its 2% target.

“This is good news, but we will need more of it,” remarked Lindsay Rosner, head of multi-sector investing at Goldman Sachs Asset Management.

This positive development follows a period earlier this year when progress in taming inflation had stalled. Recent robust job market reports had also raised concerns about persistent inflationary pressures. However, a swift deceleration in inflation could spark fears of a significant decline in consumer spending, potentially leading to a recession.

Traders are increasingly wagering on a potential Federal Reserve rate cut as early as September, according to data from CME Group.

Sectors that stand to benefit most from lower interest rates spearheaded the market rally. Smaller companies, which are more vulnerable to higher borrowing costs than their larger counterparts, experienced substantial gains, with the Russell 2000 index of smaller stocks jumping 2.7%.

Real-estate stocks also surged, as lower interest rates render bonds less appealing, potentially driving investors towards dividend-paying real-estate owners. Boston Properties, an office owner, saw a 5.9% increase.

Lower interest rates could also result in reduced mortgage rates, stimulating the housing market. Homebuilder D.R. Horton climbed 5.2%.

Oracle played a key role in propelling the market upward, with a 12.6% jump despite reporting weaker-than-expected profits for the most recent quarter. Analysts highlighted strong bookings, including contracts associated with artificial intelligence training.

The enthusiasm surrounding AI has driven stocks to record highs, despite concerns about elevated interest rates and the resulting economic slowdown. Nvidia, a key player in the AI sector, gained 3%, pushing the S&P 500 higher, with its market value exceeding $3 trillion.

In the bond market, the yield on the 10-year Treasury fell to 4.27% from 4.40% late Monday and from 4.60% a couple of weeks ago. The two-year Treasury yield, which closely tracks expectations for the Fed, dropped to 4.67% from 4.83% late Monday.

European stock indexes also climbed following the encouraging U.S. inflation data. In Asia, where markets closed before the data was released, indexes were mixed. Japan’s Nikkei 225 index declined by 0.7% as investors awaited the Bank of Japan’s latest interest rate announcement scheduled for Friday.