Stock Market Rallies as Inflation Shows Signs of Easing

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U.S. stocks surged on Wednesday amid a global rally following a surprisingly positive update on inflation.

By mid-morning, the S&P 500 was up 1.1%, poised to build on the all-time high it set the previous day. The Dow Jones Industrial Average climbed 270 points, or 0.7%, while the Nasdaq composite saw a 1.6% increase.

The bond market experienced an even stronger reaction, with Treasury yields plummeting after the report showed U.S. consumer prices rose by 3.3% in the past month compared to the previous year, slightly below economists’ expectations of 3.4%.

For Wall Street, a slowdown in inflation is not only beneficial for U.S. households struggling with rising prices but also increases the likelihood of the Federal Reserve cutting its main interest rate. Such a move would alleviate pressure on the economy and boost investment prices.

Following the inflation data, various assets, including bitcoin, gold, and copper, rallied. A measure of investor nervousness in U.S. stocks also eased.

While the Federal Reserve is not expected to cut interest rates at its current meeting, which concludes Wednesday afternoon, it has emphasized the need for sustained data showing inflation moving towards its 2% target.

“This is good news, but we will need more of it,” said Lindsay Rosner, head of multi-sector investing at Goldman Sachs Asset Management.

This positive development follows a period earlier this year where progress in reducing inflation had stalled. Recent strong job market reports had also raised concerns about persistent inflation pressures. However, a rapid slowdown in inflation could raise fears of a significant drop in consumer spending, potentially leading to a recession.

Traders are increasingly betting on a potential Federal Reserve rate cut as soon as September, according to data from CME Group.

Sectors that benefit the most from lower interest rates led the market rally. Smaller companies, which are more affected by higher borrowing costs than their larger counterparts, saw significant gains, with the Russell 2000 index of smaller stocks jumping 2.7%.

Real-estate stocks also soared, as lower interest rates make bonds less attractive, potentially driving investors towards dividend-paying real-estate owners. Boston Properties, an office owner, saw a 5.9% increase.

Lower interest rates could also reduce mortgage rates, stimulating the housing market. Homebuilder D.R. Horton climbed 5.2%.

Oracle helped drive the market higher, with a 12.6% jump despite reporting weaker-than-expected profits for the latest quarter. Analysts highlighted strong bookings, including contracts related to artificial intelligence training.

The excitement surrounding AI has driven stocks to record highs despite concerns about high interest rates and the resulting economic slowdown. Nvidia, a key player in the AI sector, gained 3%, pushing the S&P 500 higher, with its market value exceeding $3 trillion.

In the bond market, the yield on the 10-year Treasury fell to 4.27% from 4.40% late Monday and from 4.60% a couple of weeks ago. The two-year Treasury yield, which closely tracks expectations for the Fed, dropped to 4.67% from 4.83% late Monday.

European stock indexes also surged following the encouraging U.S. inflation data. In Asia, where markets closed before the data was released, indexes were mixed. Japan’s Nikkei 225 index fell by 0.7% as investors awaited the Bank of Japan’s latest interest rate announcement due Friday.

Featured Image: Freepik @ wirestock

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About the author: Stephanie Bedard-Chateauneuf has over six years of experience writing financial content for various websites. Over the years, Stephanie has covered various industries, with a primary focus on tech stocks, consumer stocks, health stocks, and personal finance. This stock lover likes to invest for the long-term. Stephanie has an MBA in finance.