Stocks surged in a buy-everything relief rally as slower-than-projected price growth spurred bets the Federal Reserve can downshift its aggressive rate-hike path.

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Stocks skyrocket in best inflation day rally in more than a decade Back to video

The S&P 500 climbed 5.5 per cent for the best first-day reaction to a CPI report since at least 2003 when records began. More than 90 per cent of stocks in the benchmark were in the green. The 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 per cent, 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. 

Thursday’s intense rally only partially claws back steep losses for risk assets hammered this year by the Fed’s tightening. The S&P 500 is still down 17 per cent and the Nasdaq 100 is off nearly 30 per cent, with both headed for their worst years since 2008.

Treasuries soared, sending the rate on two-year notes, more sensitive to monetary policy, down 28 basis points. Rates traders downgraded the odds of another three-quarter-point rate increase in December almost to nil, while continuing to price in a half-point hike.

“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 appropriate to slow the pace to better assess economic conditions. San Francisco’s Mary Daly said the moderation was “good news,” but noted “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 per cent in the first half of next year, from more than five per cent 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.”

Some of the main moves in markets:

Stocks

Currencies

Cryptocurrencies

Bonds

Commodities

Bloomberg.com