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Business

Stocks trim early gains as traders analyze CPI data: Markets Wrap




(Bloomberg) — U.S. stocks advanced and Treasury yields fell across the curve after data showed prices rose less than forecast last month, underpinning optimism that the Federal Reserve will slow the pace of rate hikes.

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The S&P 500 jumped as much as 2.8%, and the tech-heavy Nasdaq 100 rose a whopping 3.9% before paring its gains. The policy-sensitive two-year Treasury yield fell more than 15 basis points after a key gauge of US consumer prices posted its smallest monthly increase in more than a year. The greenback halted a two-day rally.

Tuesday’s data, taken with slower-than-expected CPI printing last month, validates the Fed̵[ads1]7;s projected half-point move on Wednesday and sets the tone for future rate decisions. Swaps also trimmed their bets on rate hikes, with the odds now favoring a quarter-point hike as early as the Fed’s February meeting.

Read more: US core CPI shows smallest monthly increase in more than a year

“For the second month in a row, inflation came in below expectations. This is good news for the markets and the Federal Reserve,” said Phillip Neuhart, director of market and economic research for First Citizens Bank Wealth Management. “Should this downward trend continue, it will allow the Fed to slow down in rate hikes and finally take a break in the first half of next year.”

Some investors are nevertheless approaching the CPI surprise cautiously.

“While the war on inflation is turning, we are far from declaring victory and the Fed will maintain its hawkish stance for some time to come, even if it potentially forces a recession,” said Richard Carter, head of fixed-rate research at Quilter Cheviot.

The CPI-driven stock rally fails to recognize that corporate earnings are just starting to see the impact of tight monetary policy, James Athey, chief investment officer at Abrdn.

“As the full effects of the Fed’s aggressive actions this year play out next year, it seems inevitable that we will see a significant repricing lower in EPS forecasts and thus the broad market,” Athey said.

After the Fed, the European Central Bank will announce its interest rate decision on Thursday. Markets will also contend with decisions from the Bank of England and monetary authorities in Mexico, Norway, the Philippines, Switzerland and Taiwan.

Important events this week:

  • FOMC rate decision and Fed Chair’s press conference, Wednesday

  • China medium-term lending, real estate investment, retail sales, industrial production, unemployment surveyed, Thursday

  • ECB interest rate decision and ECB President Lagarde briefing, Thursday

  • Price decisions for UK BOE, Mexico, Norway, Philippines, Switzerland, Taiwan, Thursday

  • US Cross-Border Investment, Business Inventories, Empire Manufacturing, Retail Sales, Initial Jobless Claims, Industrial Production, Thursday

  • Eurozone S&P Global PMI, CPI, Friday

Some of the main features of markets:

Stock

  • The S&P 500 rose 1.6% as of 10:27 a.m. New York time

  • The Nasdaq 100 rose 2.5 percent

  • The Dow Jones Industrial Average rose 0.8 percent

  • Stoxx Europe 600 rose 2.1%

  • The MSCI World index rose 0.5 percent

Currencies

  • The Bloomberg Dollar Spot Index fell 1 percent

  • The euro rose 0.9% to $1.0631

  • The British pound rose 1% to $1.2392

  • The Japanese yen rose 1.8% to 135.22 per dollar

Cryptocurrencies

  • Bitcoin rose 3.5% to $17,780

  • Ether rose 4.2% to $1,328.93

Bonds

  • The yield on 10-year government bonds fell 16 basis points to 3.45%

  • Germany’s 10-year yield fell four basis points to 1.90%

  • UK 10-year yields rose five basis points to 3.25%

Raw materials

  • West Texas Intermediate crude rose 2.2% to $74.79 a barrel

  • Gold futures rose 2.1% to $1,830.80 an ounce

This story was produced with assistance from Bloomberg Automation.

–With assistance from Natalia Kniazhevich, Reade Pickert, Michael Msika and Sagarika Jaisinghani.

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©2022 Bloomberg LP



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