S&P 500 Up 2% as Yields Tumble After CPI Surprise: Markets Wrap

(Bloomberg) — Stocks climbed while bond yields sank as an unexpected inflation slowdown bolstered bets the Federal Reserve’s aggressive hiking cycle is now over — and its next move will be a cut in mid-2024.

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More than 95% of the S&P 500 companies rose, with the gauge up 2%. Tesla Inc. led gains in megacaps and Nvidia Corp. extended its rally into a 10th straight session. Financial shares also saw a big advance, especially regional banks — which climbed 6%. The Russell 2000 index of small caps jumped over 4% — the most in a year. Treasury two-year yields plunged about 20 basis points to 4.85%. The dollar fell 1%. Fed swaps priced in 50 basis points of easing in July.

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The so-called core consumer price index, which excludes food and energy costs, increased 0.2% from September, according to government figures. Economists favor the core gauge as a better indicator of underlying inflation than the overall CPI. That measure was little changed, restrained by cheaper gasoline.

To Chris Zaccarelli at Independent Advisor Alliance, whether or not the economy can stay out of recession remains to be seen, but the market should continue to rally as people begin to accept that higher rates are off the table — which should push stock and bond prices higher.

“The last of investors not convinced the Fed is done are likely throwing in the towel,” said Bryce Doty at Sit Fixed Income Advisors. “The next Fed action is more likely to be a cut next summer than another rate increase.”

The drop in inflation suggests that recent monetary policy has been doing its job and make the prospect of a soft landing ever more likely, according to Richard Flynn at Charles Schwab UK

“This good news reinforces the likelihood that central bankers will hold off from further rate hikes in this cycle, which is the direction they seem to be leaning in any case.”

“With the US economy holding up, the inflation data are ‘soft-landing nirvana’ for the equity markets,” said Neil Dutta, head of economics at Renaissance Macro Research.

“We need to see more months with soft inflation data, but the stock and bond market is celebrating today,” said Gina Bolvin, president of Bolvin Wealth Management Group. “We’re set up nicely for a year-end rally.”

Fedspeak

Traders will also keep an eye on another slew of Fed speakers throughout the day to get their thoughts on the latest data and how that would impact the central bank’s next steps, especially when it comes to the outlook for rate cuts.

Fed Bank of Richmond President Thomas Barkin said he’s not convinced inflation is on a clear path toward the central bank’s 2% target despite “real progress” curbing price pressures in recent months.

Bond giant Pacific Investment Management Co. — among the many whose expectations for a rally this year were disappointed — is renewing the call for 2024.

Bonds “have rarely been as attractive as they appear today” relative to stocks, Pimco managers Erin Browne, Geraldine Sundstrom and Emmanuel Sharef say in a new report predicting “prime time” for the asset class in 2024.

Investors turned the most bullish on bonds since the global financial crisis on “big conviction” that rates will move lower in 2024, according to the latest Bank of America Corp. fund manager survey. The poll showed investors were dumping cash to hold the biggest overweight position in bonds since 2009.

BofA’s Michael Hartnett said the “big change” was not the macro outlook, but expectations that inflation and yields will move lower in 2024.

Elsewhere, Bank of England Chief Economist Huw Pill said interest rates in the UK will need to remain in “restrictive” territory to choke off the risk that inflation persists. China plans to provide at least 1 trillion yuan ($137 billion) of low-cost financing to the nation’s urban village renovation and affordable housing programs in its latest effort to shore up the struggling property market, according to people familiar with the matter.

Corporate Highlights:

Snap Inc. climbed after the Information reported Amazon.com Inc. agreed to let its users shop for products directly from ads on the Snapchat app.
Home Depot Inc. narrowed its guidance for a decline in this year’s profit and revenue as home-improvement demand wanes.
Boeing Co. extended its successful order haul on the second day of the Dubai Air Show, winning a deal from Ethiopian Airlines for more narrow- and widebody aircraft while rival Airbus SE continued to chase an increasingly elusive deal with Emirates.
Glencore Plc will buy a majority stake in Teck Resources Ltd.’s coal business, ending a months-long saga that transfixed the mining industry and setting the stage for the commodity giant to exit the coal business itself.
Siemens Energy AG has secured a €15 billion ($16.2 billion) deal with the German government, its biggest shareholder Siemens AG and a consortium of banks, as the troubled manufacturer weathers massive losses at its wind-turbine unit.

Key events this week:

China retail sales, industrial production, fixed-asset investment, Wednesday
Japan GDP, industrial production, Wednesday
UK CPI, Wednesday
US retail sales, business inventories, PPI, Empire manufacturing, Wednesday
Target earnings, Wednesday
China new home prices, Thursday
US initial jobless claims, industrial production, Thursday
Walmart earnings, Thursday
US President Joe Biden and Chinese President Xi Jinping expected to speak at APEC leaders summit, Thursday
Cleveland Fed President Loretta Mester, New York Fed President John Williams and Fed vice chair for supervision Michael Barr speak, Thursday
Bank of England deputy governor Dave Ramsden and ECB President Christine Lagarde speak at event, Thursday
US housing starts, Friday
US Congress faces a midnight deadline to pass a federal spending measure, Friday
ECB President Christine Lagarde speaks, Friday
Chicago Fed President Austan Goolsbee, Boston Fed President Susan Collins and San Francisco Fed President Mary Daly speak, Friday