December 4, 2022

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Markets rise amid signs of slowing inflation

Markets rise amid signs of slowing inflation

Shares rose on Thursday, after new data showed a moderate inflationreinforcing investor expectations that the Federal Reserve will soon slow the pace of interest rate increases that have weighed on the market.

The S&P 500 rose 4.4 percent in morning trading. If it continues all day, it will be the best one-day performance of the index since April 2020 and the early market recovery from the pandemic.

Other markets also saw big moves, with the US dollar down 2 percent, a welcome sign for countries around the world whose currencies have plummeted as the US currency climbed to a two-decade high. US government bond yields, which support borrowing costs worldwide and are particularly affected by expectations of future interest rate increases, fell sharply.

“This is what we’ve all been waiting for because so much depends on this,” said Christina Huber, chief global market strategist at Invesco. “I think there is a good chance that inflation has peaked and is now declining.”

Thursday’s consumer price index data showed that prices rose more slowly in October than economists had expected, providing a tailwind to financial markets bruised earlier in the week by unexpectedly close midterm elections and turmoil in cryptocurrency markets, in the wake of the near crash. for one of them. One of the largest cryptocurrency exchanges.

Investors said the previous slowdown drove markets higher, and with crypto markets reclaiming some of their gains on Thursday, and the election approaching the final result, the release of better-than-expected CPI data means stock markets are going “crazy,” said Andrew Brenner, Head of Income International constant at National Alliance Securities.

“It was a big drop” in the CPI, he said.

Sima Shah, global chief strategist at Key Asset Management, said the numbers would be met with a “welcome” in stock markets, noting that the pace of year-on-year inflation was lower now than it was before the conflict in Ukraine. Rising prices. “The long-awaited decline in inflation could be underway now.”

The palpable sense of relief in the markets reflects the pain caused by inflation this year, as higher prices have increased costs for businesses and slashed profits.

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For investors, medicine has been as bad as a disease, as the Fed has sought to reduce stubbornly high inflation by slowing the economy as interest rates rise, increasing borrowing costs for consumers and businesses. Even after Thursday’s move, the S&P is down 18 percent this year.

With inflation beginning to slow, investors are hoping it will mark the beginning of the end of the Fed’s rate increases, although some analysts and investors have warned that it will take longer for inflation to slow before the central bank stops raising rates. “This is the first step,” said Ms. Huber.

Fed Chairman, Jerome H. Powell, a hard line on Central Bank meeting last weeksaying that the task of reducing inflation is not over yet.

A chorus of Federal Reserve officials made clear Thursday that central bankers will stick to their plans to raise interest rates to a restrictive level for the economy and hold them for some time, even if they slow the pace of those moves in the coming months. .

While the cooler inflation number was welcome, it was just one data point and the price increases remained very fast.

A slowdown in the pace of interest rate moves could happen soon, but a pause in rate increases “isn’t even a discussion item,” Mary C. Daly, president of the San Francisco Fed, said during a webcast event. remain “far from victory”.

However, after driving expectations of future interest rate hikes higher after Mr. Powell’s comments last week, investors reassessed expectations after seeing the new inflation numbers. They have now assessed any chance of a fifth straight three-quarter point increase in December, instead expecting a smaller 0.5 percentage point increase in the Fed’s policy rate.

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Market expectations of where interest rates will move next year have fallen from a peak of more than 5 percent to about 4.85 percent on Thursday, as investors backtracked on their expectations for the number of rate hikes to come. The yield on the two-year Treasury, which is influenced by changes in Fed policy, fell more than 0.2 percent to about 4.3 percent, the largest one-day drop since 2008.

The slide in interest rate expectations helped the stock markets. The Nasdaq Composite Index, filled with technology stocks most sensitive to changes in interest rates, rose more than 6 percent on Thursday.

Some investors are now expecting stocks to maintain their rally during the usual quiet Thanksgiving holiday and into December, when the next major update on the health of the labor market is released. Others are more careful.

“As much as I love a bull market, this is still a bull market,” said John Lynch, chief investment officer at Comerica Wealth Management, on Thursday. “We haven’t reached the bottom.”

Jenna Smyalek Contribute to the preparation of reports.