Wall Street rally lifts Nasdaq 20% from low as inflation fears ebb

  • The Fed is now seen delivering a 50 bps increase in September
  • Growth in consumer prices in the US slows down in July
  • Musk sells $6.9 billion worth of Tesla shares
  • The volatility index closes at a four-month low

NEW YORK, Aug 10 (Reuters) – Wall Street rallied on Wednesday, sending the Nasdaq more than 20% above its June low, after U.S. inflation eased more than expected in July and raised hopes that the Federal Reserve will be less aggressive on interest rate increases.

A sharp drop in gasoline costs helped keep the U.S. consumer price index flat last month after rising 1.3% in June, the Labor Department said. The CPI rose by less than expected 8.5% in the last 12 months after an increase of 9.1% in June. read more

The rally came in the wake of the first notable sign of relief for Americans who have seen inflation steadily rise. The Nasdaq is now up 20.8% since its bottom, but still needs to pass its previous peak in November to confirm another bull market.

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Fed funds futures traders are now pricing in just a 43.5% chance of the US central bank raising interest rates by 75 basis points when it meets in September, compared with 68% before the data. An increase of 50 basis points is seen as a probability of 56.5%. read more

“For the market, it’s kind of a Goldilocks scenario right now because the labor market is holding up and inflation is potentially starting to fall. That’s what a soft landing will look like,” said Shawn Snyder, head of investment strategy at Citi US Wealth Management in New York.

But one month of slowing inflation is not enough for the Fed to send a clear signal, Snyder said.

The rally on Wall Street was broad-based, with all 11 S&P 500 sectors rising in a sea of ​​green. Growth stocks (.IGX) rose more than value (.IVX), while Dow transport (.DJT), small caps (.RUT) and semiconductors (.SOX) also rose.

The Dow Jones Industrial Average (.DJI) rose 535.1 points, or 1.63%, to 33,309.51, while the S&P 500 (.SPX) gained 87.77 points, or 2.13%, to 4,210.24 and the Nasdaq Composite added (8.IX., or 2.89%, to 12,854.81.

It was the biggest one-day gain for both the Nasdaq and the S&P 500 in two weeks, and for the Dow in three weeks. It was the highest close for the S&P 500 since early May.

“(Inflation at) 8.5% is still very high, but there is optimism that maybe June was the peak,” said Randy Frederick, vice president of trading and derivatives for Charles Schwab.

July producer price data on Thursday along with August inflation and employment data for release next month could change the Fed’s course again, Frederick said.

The Fed has raised interest rates by 225 basis points since March despite fears that the sharp rise in borrowing costs could tip the US economy into recession.

Traders work on the trading floor of the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S., August 8, 2022. REUTERS/Andrew Kelly

The decline in inflation was the first “positive” reading on price pressures since the Fed began tightening policy, Chicago Fed President Charles Evans said, even as he signaled he believes the Fed has much more work to do. read more

After a rough start to the year, the benchmark S&P 500 is up nearly 15% from mid-June lows, largely on expectations that the Fed will be less hawkish than expected in its efforts to provide a soft landing for the economy as it battles to to curb inflation.

But the S&P 500 is 12% below its all-time high in January, having been in a bear market ever since.

The CBOE Volatility Index (.VIX), Wall Street’s fear gauge, fell below the 8 p.m. level to close at more than four-month lows.

High-growth and megacap technology stocks, whose valuations are vulnerable to rising bond yields, rose as government yields fell sharply across the board. Apple Inc ( AAPL.O ), Alphabet Inc ( GOOGL.O ), Inc ( AMZN.O ) and Microsoft Corp ( MSFT.O ) all rose more than 2% each.

Financially sensitive banks ( .SPXBK ) rose 2.7%, with Goldman Sachs Group Inc ( GS.N ) and Morgan Stanley ( MS.N ) climbing around 3% each.

“The banks have underperformed and are now getting bids,” said Thomas Hayes, managing member of Great Hill Capital LLC, adding that investors are chasing the laggards who haven’t joined the rally since the June lows.

Tesla Inc ( TSLA.O ) rose 3.9% after Elon Musk sold shares worth $6.9 billion in the electric car maker to fund a potential deal for Twitter Inc ( TWTR.N ) if he loses a legal battle with the social media platform . Twitter increased 3.7 percent. read more

Meta Platforms Inc ( META.O ) jumped 5.8% after the Facebook parent said on Tuesday it had raised $10 billion in its first-ever bond offering. read more

Volume on US exchanges was 11.33 billion shares, compared to the 10.98 billion average for the full session over the past 20 trading days.

Advances outnumbered decliners on the NYSE by a ratio of 5.69 to 1; on the Nasdaq, a ratio of 3.34 to 1 favored advances.

The S&P 500 posted five new 52-week highs and 29 new lows; The Nasdaq Composite recorded 64 new highs and 54 new lows.

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Reporting by Herbert Lash; Additional reporting by Bansari Mayur Kamdar, Aniruddha Ghosh, Sruthi Shankar, Medha Singh and Karina D’Souza in Bengaluru; Editing by Anil D’Silva, Shounak Dasgupta and Lisa Shumaker

Our standards: Thomson Reuters Trust Principles.

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