Stocks test intraday highs on strong CPI relief rally: Markets fold

(Bloomberg) — Stocks are headed for their best post-inflation rally in more than a decade, as slower-than-expected price growth fueled bets that the Federal Reserve may scale back the pace of aggressive rate hikes.

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More than 90% of S&P 500 stocks were swept in the rally that left the benchmark poised for its best first-day reaction to a CPI report since 2008. The relief rally caught short-sellers on the wrong foot, helping to push huge profits. The change in sentiment also helped cryptocurrency markets stabilize despite the turmoil surrounding the FTX cryptocurrency exchange.

Core inflation came in at 7.7%, the lowest level since January, before Russia’s war in Ukraine pushed up commodity prices. More important for the Fed, the key measure excluding food and energy slowed more than expected.

The rally in stocks comes as Fed tightening has hammered risk assets all year. The S&P 500 is still down nearly 18% and the Nasdaq 100 is down nearly 30%.

Treasuries soared, sending the yield on two-year notes, more sensitive to monetary policy, below 28 basis points. Currency traders are paring bets on Fed hikes, with exchanges now showing that a 50 basis point hike in December is much more likely than a 75 basis point move.

“The first negative inflation surprise in several months will inevitably be met with an equity market applause,” wrote Seema Shah, head of global strategy at Principal Asset Management. “A rise of 0.5%, rather than 0.75%, in December is clearly on the cards but, until we get a series of these types of CPI reports, a pause is still some way out.”

Fed officials appeared to support a tapering of interest rate hikes after a string of four larger increases. They also stressed the need for the policy to remain strict.

Dallas Fed President Lori Logan said a slowdown may soon be indicated to better assess economic conditions. San Francisco’s Mary Daly said the moderation was “good news” but noted “one month of data doesn’t mean victory.” He also said that “the pause is not the debate, the debate is retreating.”

Swap markets cut bets on a peak rate to slightly less than 4.9% in the first half of next year, from 5% higher before the CPI data.

Market reaction to CPI report

Rick Rieder, Head of Global Fixed Income Investments at BlackRock Financial Management Inc.:

“Today’s CPI report showed some modest improvement as some of the previously elevated excessively high inflation, such as used cars, began 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 a longer period of time. Investors should be more concerned about the effect of rising interest rates in a slowing economy on their portfolio values ​​than the current level of inflation.”

Max Gokhman, Chief Investment Officer for AlphaTrAI:

“We expected there to be a slowdown in commodity prices, but to also see services fall was a bigger bonus than any banker will get this year. That said, this won’t prompt the Fed to reconsider a 50bp hike in December, so traders are tempering their initial enthusiasm.”

Ipek Ozkardeskaya, senior analyst at Swissquote Bank:

“Hallelujah! We finally saw a strong hit on US inflation. Both headline and core data were lower than expected. And that helped temper hawkish Fed expectations, pull the US dollar and yields lower. Soft inflation has been a breath of fresh air for the entire market.”

Guillermo Hernandez Sampere, Head of Trading at MPPM Asset Management GmbH:

“Pivot Party to start now, short compression will spark the rally. If the rest of the cash comes to work, we’ve seen the lows for a while.”

James Athey, investment director at Aberdeen Asset Management:

“Stocks will love it and are likely to take over and keep running. Of course, this can make the Fed uncomfortable at this early stage in the deflation process, so watch out for Fedspeak if stocks get too frothy.”

Key events this week:

Some of the main movements in the markets:

inventories

  • The S&P 500 was up 4.7% at 2:08 p.m. New York time

  • The Nasdaq 100 rose 6.3%

  • The Dow Jones Industrial Average rose 3.2%

  • MSCI World index rose 3.8%

currency

  • The Bloomberg Dollar Spot Index fell 1.7%

  • The euro gained 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

Bindings

  • The 10-year bond yield fell 25 basis points to 3.85%

  • Germany’s 10-year yield fell 16 basis points to 2.01%

  • Britain’s 10-year yield fell 16 basis points to 3.29%

Goods

  • 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 created with help from Bloomberg Automation.

–With help 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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