US stocks and government bonds rallied on Wednesday after data showed inflation in the world’s largest economy had steadied, raising hopes that the Federal Reserve may temper its aggressive rate rises to subdue soaring prices.
The consumer price index data published on Wednesday showed that prices in the US rose 8.5 per cent year on year in July, a slower increase than in June and below economists’ forecasts of 8.7 per cent. The figures also showed that on a month-on-month basis, there was no increase in the CPI in July compared with a 1.3 per cent rise in June.
The blue-chip S&P 500 gained 1.8 per cent by afternoon trading on Wall Street, while the technology-heavy Nasdaq Composite rose 2.4 per cent.
Encouraged by the improved economic outlook, investors piled into consumer-focused stocks, with cruise companies Norwegian, Royal Caribbean and Carnival up 14, 11.6 and 11.4 per cent respectively. Facebook owner Meta and Tinder owner Match Group were among the highest risers on the Nasdaq 100, with both gaining around 6 per cent.
The S&P 500 has now climbed more than 14 per cent since mid-June, and the moves put it on track to snap four consecutive days of losses.
The Vix volatility index, which serves as a measure of expected swings in US stocks, fell below 20 for the first time since April.
“Inflation has been expected to peak over the summer for some time, so it was reassuring for markets that there are clear signs that this looks to be happening,” said Oliver Blackbourn, portfolio manager at Janus Henderson Investors.
In government bond markets, the yield on the 10-year US Treasury bond, which moves with inflation and growth expectations, dropped 0.03 percentage points to 2.77 per cent. The yield on the two-year note, which moves with interest rate expectations, shed 0.1 percentage points to 3.16 per cent.
The US dollar, a haven for investors in times of uncertainty, also fell back in reaction to the data, dropping 1.3 per cent against a basket of six currencies.
Still, the inflation data show that prices remain well above the US central bank’s 2 per cent target.
“While peak inflation is welcome news, it’s probably not enough to allow the Fed to ease off its tightening or to put recession fears to bed,” said Mike Bell, global market strategist at JPMorgan Asset Management.
Core inflation, a measure of price growth that strips out volatile categories including energy and food, also came in below expectations, staying at the 5.9 per cent level it hit in June and well below a peak in March of 6.5 per cent.
“I think this might be a new bull market as opposed to a bear market rally. The Fed will pivot eventually, the rate of increases will have to slow,” said Patrick Spencer, vice-chair of equities at Baird.
However, others warned that inflation remains high. “It’s nice to see a report come in cooler, but we’ll leave the champagne bottles closed for now,” said Brian Nick, chief investment officer at Nuveen. “It does feel like a snap reaction, undoing the falls after the unemployment report”, which showed that the US labour market remains hot last Friday.
In Europe, the Stoxx 600 closed up 0.9 per cent and Germany’s Dax index gained 1.2 per cent after losses in the previous session.
Declines in tech stocks dragged down indices in Asia, which closed before the publication of the CPI data. Hong Kong’s Hang Seng closed down 2 per cent, China’s CSI 300 benchmark of Shanghai and Shenzhen-listed stocks fell 1.1 per cent and Japan’s Topix closed down 0.2 per cent.
Read More: US stocks and bonds rally after lower-than-forecast inflation data