Wall Street surges, Dow up 1,200 points on cooling inflation
Wall Street soared Thursday to its best day in more than two years as exhilaration swept through markets after a report showed inflation in the United States eased last month even more than expected.
The Standard & Poor’s 500 index surged 5.5%, the Dow Jones industrial average leaped 1,200 points and the Nasdaq composite packed what could be a year’s worth of gains into one day by roaring 7.4% higher.
Prices jumped for metals, European stocks and other investments as investors took the data as a sign that the worst of high inflation may finally have passed, though analysts cautioned it’s still premature to declare that with certainty. Even bitcoin clawed back some of its steep plunge in recent days caused by the crypto industry’s latest crisis of confidence.
Some of the most dramatic action was in the bond market, where Treasury yields tumbled sharply as investors pared bets for how aggressive the Federal Reserve will be in raising interest rates to get inflation under control. Such increases have been the main reason for Wall Street’s struggles this year and are threatening a recession.
The yield on the 10-year Treasury, which helps set rates for mortgages and other loans, fell to 3.82% from 4.15%. It’s a dramatic move for the bond market, and the yield was on track for its biggest daily drop since 2009, according to Tradeweb. The two-year yield, which more closely tracks expectations for Fed action, fell to 4.32% from 4.62% and was on pace for its sharpest fall since 2008.
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All the action stemmed from a U.S. government report showing that inflation slowed in October for a fourth straight month since hitting a peak of 9.1% in June. The reading of 7.7% was better than the 8% economists were expecting.
Perhaps more important, inflation also slowed more than expected after ignoring the effects of food and energy prices. That’s the measure the Fed pays closer attention to. Inflation between September and October also eased.
“The month-on-month rate of inflation is much more informative,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “On that measure, inflation is still high, but not scary high.”
Slower inflation could keep the Fed off the most aggressive path in raising interest rates. It’s already boosted its key rate to a range of 3.75% to 4%, up from virtually zero in March.
By raising rates, the Fed is intentionally trying to slow the economy and job market in hopes of undercutting inflation, which hit a four-decade high in the summer. The risk is that it can create a recession if it goes too far, and higher rates drag down prices of stocks and other investments in the meantime.
Higher rates have particularly hit high-growth tech stocks, cryptocurrencies and other investments seen as the riskiest or most expensive.
Big tech stocks were some of the most buoyant forces on Wall Street after the inflation report. Apple rose 8.9%, Microsoft climbed 8.2% and Amazon soared 12.2%.
The Nasdaq composite, which is full of tech-oriented stocks, soared to its best day since March 2020, when Wall Street was in the midst of its frenzied recovery from the crash caused by the coronavirus. The broader S&P 500, which sits at the heart of many 401(k) accounts, had its best day since April 2020.
The S&P 500 climbed 207.80 points to 3,956.37. The Dow rose 1,201.43 points, or 3.7%, to 33,715.37, and the Nasdaq shot up 760.97 points to 11,114.15.
Home builders and other companies in the housing industry were also strong on hopes the Fed will take it easier on rate increases, which have already sent mortgage rates to industry-punishing levels. PulteGroup jumped 13.5% and Lennar rose 12.6%, among the biggest gains in the S&P 500.
Slower inflation could get the Federal Reserve to downshift the size of its rate increases at its next policy meeting in December, after it pushed through four straight mega increases of three-quarters of a percentage point. That could open the way for the Fed to return to the more typical increases of a quarter of a percentage point before pausing hikes completely.
After Thursday’s inflation report, traders increasingly shifted into bets for the Fed to raise rates by only half a percentage point next month, instead of another three-quarters of a point.
Although Thursday’s report on inflation was encouraging, analysts cautioned that the Fed’s campaign against high inflation is probably far from over. Inflation data have also given false hope before, only to accelerate again.
“The Fed was adamant that it won’t hit the brakes on rate hikes until inflation slows, and while the market’s rally indicates investors may see light at the end of the tunnel, it will get one more reading before its decision next month,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office. “Remember that even as we see a slowdown, prices remain elevated and have a long way to go before normalizing.”
Another potentially market-shaking report will hit Wall Street on Friday, when the latest reading arrives on how much inflation U.S. households see coming in future years. Fed Chair Jerome H. Powell has said he’s paying particularly close attention to such expectations.
One of the reasons the Fed has been so aggressive about raising rates is because it wants to avoid a debilitating cycle in which expectations for high inflation push people to change their behaviors in ways that lead to even higher inflation.
AP business writers Joe McDonald, Matt Ott and Tom Krisher contributed to this report.