The S&P 500 rallied 4%, poised for the best first-day reaction to a CPI report since 2008. Gains in the tech-heavy Nasdaq 100 topped 5%.
Treasuries soared across the board, sending the rate on two-year notes, more sensitive to monetary policy, down 25 basis points. Rates traders pared bets on Fed hikes, with swaps indicating now that a 50-basis-point increase in December is far more likely than a 75-basis-point move. Investors may treat the 7.7% headline figure as the latest evidence of peaking consumer-price growth, with potential to usher in an end to interest-rate hikes. The report also showed the consumer-price index coming in softer than expected on a month-on-month basis as well as in its core reading.
“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.
“Inflation is still way above the Fed’s 2% target and we believe the Fed will keep their word and continue to raise interest rates,” Michael Landsberg, chief investment officer, Landsberg Bennett Private Wealth Management, wrote. “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.
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