After a smaller-than-expected increase in U.S. consumer prices prompted optimism that the Federal Reserve will moderate its aggressive stance on interest rate hikes, Wall Street’s main indexes increased on Tuesday, led by mega-cap stocks, which are sensitive to rates.
The benchmark S&P 500 (.SPX) reached a three-month peak in early trading as statistics revealed that consumer prices in the US barely increased in November despite drops in the price of gas and used automobiles, resulting in the smallest annualized rise in inflation in over a year.
The S&P 500 Growth index (.IGX), as well as the S&P 500 Real Estate index (.SPLRCR), reached their best levels in more than two months as a result of increasing wagers on a future slowdown in the rate at which the Fed raises interest rates.
Fed funds futures prices indicated a better-than-even likelihood that the Fed will follow an anticipated half-point rate hike this week with lesser 25-basis point hikes at its first couple meetings of 2023, bringing the policy rate to the range of 4.75%-5.00%.
Josh Markman, a partner at Bel Air Investment Advisors, pondered whether the Fed will maintain rates high but there is a chance that they will halt later in 2019.
He further stated that markets are already anticipating months of inflation relief, beyond the anticipated 2023 recession. There may be a small Santa Claus gathering.
Morgan Stanley strategists predict that the Fed will end the cycle of rate increases in March, putting the peak Federal funds rate at 4.625%.
Consumer prices rose 7.1% annually in November, according to the U.S. Labour Department’s report, while the core rate—which includes volatile food and energy cost—was up 6.0%.
Analysts had anticipated a 7.3% increase in the headline CPI and a 6.1% increase in core rates.
The data for producer prices for November was slightly higher than anticipated last week, although it indicated a slowing in the trend.
Wall Street’s fear measure, the CBOE volatility index (.VIX), touched a one-week low of 21.46 points, indicating that investor apprehension has decreased.
The S&P 500 (.SPX) was open 55.72 points, or 1.40%, to 4,046.28 at 11:46 a.m. ET, while the Nasdaq Composite (.IXIC) was higher by 221.88 points, or 1.99%, to 11,365.62.
The Dow Jones Industrial Average (.DJI) was ahead 231.96 points, or 0.68%, at 34,237.00.
Moderna Inc (MRNA.O) saw a 23.8% increase after skin cancer research using the biotechnology company’s experimental vaccine and Merck & Co Inc’s (MRK.N) popular medicine Keytruda showed encouraging results.
After Piper Sandler changed the stock rating of the social media platform from “neutral” to “overweight,” Pinterest Inc (PINS.N) increased by 11.9%.
On the NYSE and the Nasdaq, advancing issues exceeded declining ones by a ratio of 5.16 to 1 and 2.21 to 1, respectively.
The Nasdaq posted 74 newer highs and 93 new lows, compared to the S&P index’s 18 new 52-week peaks and one new low.
With data indicating that inflation is finally slowing, U.S. central bankers started their final policy-setting conference of the year on Tuesday. This allowed them to scale back their interest-rate increases until next year and, traders now predict, stop short of 5% by March.
The Federal Reserve’s policymakers are still expected to increase the policy rate by half a percentage point to a scope of 4.25 to 4.5% on Wednesday, which is still a significant increase by historical standards despite being less than the 75 basis points per meeting pace they had maintained since June.
However, futures contracts linked to the Fed policy rate shifted to price in a further lower gear next year after a Labour Department study revealed consumer prices last month grew at their weakest rate in almost a year.