Following the release of the CPI report, Fed-funds futures pricing data indicated that rates are likely to remain steady at the next Federal Reserve policy meeting.
In a remarkable turn of events, the stock market rallied strongly on Tuesday, adding to their impressive November gains. The surge was fueled by the positive reaction to new US inflation data, which raised hopes that the Federal Reserve’s rate-hiking campaign would soon end.
Tuesday’s Stock Market Rally
Specifically, the Dow Jones Industrial Average (INDEXDJX: .DJI) rose 1.43% to 34,827.70, gaining 489.83 points. Simultaneously, the S&P 500 (INDEXSP: .INX) rose 1.91%, briefly breaching the critical 4,500 level before settling at 4,495.70, its best day since April. The Nasdaq Composite (INDEXNASDAQ: .IXIC) was not far behind, rising 2.37% to 14,094.38.
This surge follows an already impressive performance for stocks this month, with the S&P 500 and Dow up 7.2% and 5.4%, respectively, and the Nasdaq on track for its most substantial monthly gain since January.
The leading force in charge of Tuesday’s stock market rally was the Technology Select Sector SPDR Fund (XLK), which tracks tech stocks in the S&P 500. The fund closed at a record high as investors returned to the tech sector, one of the areas most impacted by rate hikes.
Notably, shares of American electric vehicle maker Tesla Inc (NASDAQ: TSLA) gained more than 6%. Bank stocks, including Bank of America Corp (NYSE: BAC) and Wells Fargo & Co (NYSE: WFC), also experienced a boost on the optimistic outlook that the economy could avoid a recession.
Furthermore, individual stocks made notable gains. Home Depot Inc (NYSE: HD), up 5% on better-than-expected third-quarter earnings, led the gains for the Dow Jones Industrial Average. Meanwhile, Enphase Energy Inc (NASDAQ: ENPH), Boston Properties Inc (NYSE: BXP), and SolarEdge Technologies Inc (NASDAQ: SEDG) each saw more than 10% increases, leading the S&P higher.
Inflation Data Spurs Optimism
The market’s optimism can be traced back to the Consumer Price Index (CPI) report, a true measure of inflation, which revealed a flat reading last month. Economists, who had predicted a 0.1% month-over-month increase, were caught off guard.
The core CPI, which excludes food and energy prices, rose at its slowest pace in two years. This unexpected slowdown in inflation fueled speculation that the Federal Reserve would consider ending its rate-hiking campaign sooner than expected. “There’s optimism that inflation is cooling to a level where the Federal Reserve can take its foot off the brake,” noted Keith Buchanan, portfolio manager at Globalt Investments.
Following the release of the CPI report, Fed-funds futures pricing data indicated that rates are likely to remain steady at the next Federal Reserve policy meeting, according to the CME FedWatch Tool.
This change in sentiment was reflected in the 10-year Treasury yield, which, after shocking investors by leaping over 5% in October, tumbled below 4.5% following the softer-than-expected inflation report. The unexpected twists in inflation data have injected a renewed sense of optimism, but the market remains dynamic, requiring a watchful eye on potential shifts and developments.