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US stocks advance as inflation data raises hopes of smaller Fed rate hikes

U.S. stocks rose modestly and Treasury yields fell on Tuesday, as fresh signs that inflation cooled last month boosted hopes that the Federal Reserve would slow the pace of rate hikes.

Wall Street’s benchmark S&P 500 had climbed 0.8 percent by mid-afternoon in New York, trimming earlier gains, while the tech-heavy Nasdaq Composite was 1.5 percent higher. The S&P 500 has risen nearly 14 percent from its intraday low in the second week of October.

Tuesday’s rise followed a report showing US producer prices rose 0.2 percent in October from September, compared with expectations in a Bloomberg poll of 0.4 percent. Annual wholesale inflation came in at 8 per cent, down from 8.5 per cent in September.

“This data is further confirmation of the peak for now in inflation, evidence of which we have seen for several months,”[ads1]; said Peter Boockvar, chief investment officer at Bleakley Financial Group.

The slowdown in factory gate price growth comes after a report last week showed that US consumer inflation also eased, raising hopes among some investors that the Fed would slow its monetary tightening, which has lifted the dollar and weighed on stocks.

US Treasury bond markets rallied – the yield on two-year US Treasuries fell 0.03 percentage point to 4.38 percent. The yield on the US benchmark 10-year index fell 0.05 percentage points to 3.82 percent. Yields fall when prices rise.

However, some analysts believe that investors have become unduly optimistic on the recent rally in Wall Street stocks.

“S&P 500 daily returns of more than 2 percent tend to be more frequent in bear markets,” said analysts at Goldman Sachs, who believe the recent rally in bonds and risky assets was “probably exaggerated.”

“The larger-than-expected rebound in inflation may support a slowdown in the pace of travel, but the risk of a lengthening of the travel cycle remains,” the bank added.

Lael Brainard, deputy chairman of the Fed, said on Monday that a slower pace of rate hikes did not mean the central bank is slowing its efforts to tackle historically high inflation.

“We have done a lot, but we have additional work to do both in raising interest rates and maintaining restraint to bring inflation down to 2 percent over time,” she said, adding that while October’s better-than-expected inflation data was “reassuring” , it was only “preliminary”.

The debate over whether the recent rally in stocks represents the start of a true bull run or just a bear market rally is largely redundant in the absence of fresh economic news, said Mike Zigmont, head of trading and research at Harvest Volatility Management.

“Let’s just accept that investors are confused, but they’re not scared either,” Zigmont added. “They just got a huge dose of relief [from the latest CPI data] and now they are acclimatizing to the new environment.”

Bank of America’s latest Global Fund Manager Survey, meanwhile, revealed that 92 percent of respondents predicted a bout of stagflation — low growth and high inflation — in 2023.

Asian markets also made strong gains after Xi Jinping and Joe Biden signaled a desire to improve US-China ties at a meeting on Monday ahead of the G20 summit in Indonesia, and Beijing moved to ease some pandemic curbs.

Hong Kong’s Hang Seng index rose 4.1 percent and has risen by a quarter since its low in late October. China’s CSI 300 rose 1.9 percent, while Japan’s Topix rose 0.4 percent and South Korea’s Kospi rose 0.2 percent.

The regional Stoxx Europe 600 added 0.4 percent, while London’s FTSE fell 0.2 percent.

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