Wall Street surged to its best day since April 2020 as markets cheered a government report that inflation cooled more than expected last month.
The S&P 500 jumped 5.54% Thursday and the Dow rose 1,201 points, or 3.70%, as traders took the data as a sign the worst of inflation may have passed. The Nasdaq soared by 7.35%.
Treasury yields fell dramatically as bond markets relaxed. Even bitcoin rose on hopes a slowdown in inflation could mean the Federal Reserve won’t have to be so aggressive about raising interest rates. Such hikes have been the main reason for Wall Street’s troubles this year and are threatening a recession.
Some of the most dramatic action was in the bond market, where Treasury yields tumbled sharply as investors pared bets for how aggressive the Federal Reserve will be in hiking interest rates to get inflation under control. Such hikes have been the main reason for Wall Street's struggles this year and are threatening a recession.
The yield on the 10-year Treasury, which helps set rates for mortgages and other loans, fell to 3.85% from 4.10% late Wednesday, which is a major move for the bond market. The two-year yield, which more closely tracks expectations for Fed action, dropped to 4.32% from 4.58%.
All the action stemmed from a U.S. government report showing that inflation slowed in October for a fourth straight month since hitting a peak of 9.1% in June. The reading of 7.7% was better than the 8% economists were expecting.
Perhaps more importantly, inflation also slowed more than expected after ignoring the effects of food and energy prices. That's the measure the Fed pays closer attention to. So did inflation between September and October.
“The month-on-month rate of inflation is much more informative,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “On that measure, inflation is still high, but not scary high.”
Slower inflation could keep the Fed off the most aggressive path in raising interest rates. It's already raised its key rate to a range of 3.75% to 4%, up from virtually zero in March.
By raising rates, the Fed is intentionally trying to slow the economy and jobs market in hopes of undercutting inflation, which hit a four-decade high in the summer. The risk is that it can create a recession if it goes too far, and higher rates drag down on prices for stocks and other investments in the meantime.
Higher rates have particularly hit high-growth tech stocks, cryptocurrencies and other investments seen as the riskiest or most expensive.
Big Tech stocks were some of the most buoyant forces on Wall Street following the inflation report. Apple and Microsoft both rose 6.8%, while Amazon soared 11.7%.
Tesla also rose nearly 6%, though it remains down by roughly half since CEO Elon Musk announced in April he was Twitter’s largest shareholder. Investors fled the electric vehicle maker on fears Musk would be distracted by Twitter, and he has sold over $19 billion of Tesla stock since then.
The Nasdaq composite, which is full of tech-oriented stocks, is on track for its best day since the spring of 2020, when Wall Street was in the midst of its frenzied recovery from the crash caused by the coronavirus. The broader S&P 500, which sits at the heart of many 401(k) accounts, is as well.
Homebuilders and other companies in the housing industry were also strong on hopes the Fed will take it easier on rate hikes that have already sent mortgage rates to industry-punishing levels. Lennar and PulteGroup both jumped nearly 13% for some of the biggest gains in the S&P 500.
Slower inflation could get the Federal Reserve to downshift the size of its rate hikes at its next policy meeting in December, after it pushed through four straight mega increases of 0.75 percentage points. That could open the way for the Fed to return to the more typical increases of 0.25 percentage points before pausing hikes completely.
Following Thursday's inflation report, traders increasingly shifted into bets for the Fed to raise rates by only 0.50 percentage points next month, instead of a bigger hike.
While Thursday's report on inflation was encouraging, analysts cautioned the Fed's campaign against high inflation is likely still far from over. Inflation data has also given false hope before, only to reaccelerate again.
“The Fed was adamant that it won't hit the brakes on rate hikes until inflation slows, and while the market's rally indicates investors may see light at the end of the tunnel, it will get one more reading before its decision next month,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office. “Remember that even as we see a slowdown, prices remain elevated and have a long way to go before normalizing.”
Another potentially market-shaking report will hit Wall Street Friday, when the latest reading arrives on how much inflation U.S. households see coming in future years. Fed Chair Jerome Powell has said he’s paying particularly close attention to such expectations.
One of the reasons the Fed has been so aggressive about hiking rates is because it wants avoid a debilitating cycle where expectations for high inflation push people to change their behaviors in ways that lead to even higher inflation.
Stocks have swung sharply this week, with several factors pushing the market both up and down. On one hand, investors hope Tuesday’s elections may result in a Washington where control is split between Democrats and Republicans. That could prevent the kind of sweeping economic changes that make investors nervous, but the outlook for that is still uncertain as votes are still being counted.
Huge losses in the crypto world, meanwhile, were threatening to spill over into other markets and at least dent confidence among investors. Bitcoin was sitting below $16,500 shortly before the inflation report, down from roughly $20,000 a week ago and nearly $69,000 a year ago. It jumped back above $17,400 after the inflation report.
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