Wall Street Breathes a Sigh of Relief After Positive Inflation Data:
Wall Street experienced a wave of optimism after inflation data came in better than expected,
leading to a significant rise in stocks and a drop in bond yields.
This development has bolstered hopes that the Federal Reserve remains on track to continue cutting interest rates this year.
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Interest Rate Cut Probabilities
Performance of Indices
Stock indices managed to erase their 2025 losses, with the S&P 500 rising by approximately 2%,
marking its biggest jump since the U.S. elections in November.
Treasury bonds also posted notable gains, pushing 10-year yields down by 15 basis points,
alleviating concerns about yields potentially reaching 5% soon.
According to trading fund data from Bloomberg,
this was the best market response to a Consumer Price Index (CPI) release since late 2023.
Inflation Data Reshapes Market Expectations
December’s data showed that the U.S. Consumer Price Index increased slower than expected,
reviving expectations that the Federal Reserve could begin cutting rates sooner than anticipated.
Swap markets quickly moved to price in rate cuts by July fully.
This shift followed strong job data released the previous Friday,
which led some to believe that the Fed might delay any monetary easing until September or October.
Analysts also noted the possibility of rate hikes.
Steve Sosnick of Interactive Brokers commented,
“The market’s exaggerated anxiety led to a strong response to the recent inflation data.
Today’s gains reflect better-than-expected monthly core CPI numbers and highlight the tense sentiment dominating the markets.”
Tina Adatia from Goldman Sachs added that the latest CPI data may not be sufficient
to spark discussions about rate cuts in January.
Still, it strengthens the notion that the Fed’s rate-cutting cycle isn’t over yet.
Broad-Based Stock Gains and Renewed Risk Appetite
U.S. stock indices saw widespread gains, with the S&P 500 climbing 1.8%,
followed by a 2.3% rise in the Nasdaq 100. The Dow Jones Industrial Average added 1.7%.
Meanwhile, Bloomberg’s “Magnificent Seven” index
featuring Apple, Alphabet, Nvidia, Amazon, Meta, Microsoft, and Tesla—surged by 3.7%.
In the small-cap sector, the Russell 2000 index gained 2%,
while the KBW Bank Index saw strong gains of 4.1%,
coinciding with the start of earnings season for major banks like Citigroup,
Goldman Sachs, Wells Fargo, and JPMorgan Chase.
On another note, the VIX index, often called the market’s fear gauge,
fell to its lowest level this year, reflecting a decline in investor anxiety.
Heavily shorted stocks experienced strong recoveries,
with Goldman Sachs’ basket of underperforming tech stocks jumping 3.2%.
Meanwhile, stocks under significant short-selling pressure added 3.8% to their value.
In the cryptocurrency market, Bitcoin approached a record high of $100,000.
The 10-year Treasury yield fell to 4.64%, while Bloomberg’s spot dollar index dropped by 0.2%.
Oil prices remained elevated despite a ceasefire agreement
between Israel and Hamas, providing a temporary halt to the conflict in Gaza.
Interest Rate Cut Probabilities
Some analysts believe that the recent inflation data could trigger short-covering activity.
John Kirchner of Janus Henderson Investors noted
that markets are now more comfortable with the diminishing likelihood of interest rate hikes.
Meanwhile, Krishna Guha of Evercore stated that the CPI reading
underscores how the market has overreacted to inflation stories this year,
boosting the likelihood of two rate cuts by the Federal Reserve this year, with a possible third cut in March.
Rajiv Sharma of Key Wealth remarked that the data might not
be sufficient to prompt the Fed to accelerate rate cuts,
as the strength of the labor market remains a key factor in decision-making.
Expectations for More Market Volatility
Despite the relative calm following the inflation data release,
analysts warned of potential market volatility as further economic data is published.
Seema Shah of Principal Asset Management noted that current inflation data
doesn’t provide enough support for an immediate rate cut but could
pave the way for such a move if inflation readings continue to improve.
Solita Marcelli of UBS predicted that U.S. equities would remain attractive for long-term investors,
adding that easing inflation would support corporate earnings growth.
Mark Hackett of Nationwide emphasized the upcoming earnings season,
suggesting positive surprises could provide additional market support.
Wall Street Breathes a Sigh of Relief After Positive Inflation Data