Market Relief: Inflation Slowdown Sparks Rally
A surprise slowdown in inflation has brought a wave of relief to Wall Street, sparking a stock rally and a plunge in bond yields. This development has reinforced bets that the Federal Reserve will continue to cut interest rates this year.
Stocks Soar
The S&P 500 erased its losses for 2025, surging 2% in its biggest gain since the aftermath of the US election. The Nasdaq 100 climbed 2.3%, while the Dow Jones Industrial Average added 1.7%. A Bloomberg gauge of the “Magnificent Seven” megacaps rallied 3.7%. The Russell 2000 advanced 2%, and the KBW Bank Index surged 4.1% as Citigroup Inc., Goldman Sachs Group Inc., Wells Fargo & Co., and JPMorgan Chase & Co. kicked off the earnings season.
Bond Yields Tumble
A surge in Treasuries pushed 10-year yields down by almost 15 basis points, easing fears that a 5% rate would be on the horizon. The yield on 10-year Treasuries declined 14 basis points to 4.65%.
Commodities Roar
Oil topped $80 a barrel, and spot gold rose 0.7% to $2,696.67 an ounce. The concerted cross-asset advance was the best for a consumer price index day since at least late 2023, according to data compiled by Bloomberg.
Fed Rate Cut Expectations
Swap traders are now fully pricing in a rate cut by July, a quick shift after Friday’s jobs data spurred bets officials would only be able to resume policy easing in September or October. The US CPI rose in December by less than forecast, reinvigorating bets the Fed will slash rates sooner than previously thought.
Expert Insights
“The proximate cause of today’s rallies in stocks and bonds was a better-than-expected month-over-month core CPI reading, but the magnitude of the rallies reflected the jittery sentiment that had pervaded markets,” said Steve Sosnick at Interactive Brokers.
“The market will be encouraged by the decrease in core inflation, which should alleviate some of the pressure on stock and bond markets, both of which have had a poor start to the year on inflation fears and concerns the Fed would not only stop cutting interest rates, but could even reverse course and begin raising them,” said Chris Zaccarelli at Northlight Asset Management.
Earnings Season
The latest inflation figures are causing some short covering, according to Steve Wyett at BOK Financial. The market is relieved that potential ‘nose-bleed’ interest rates are — for now — taken off the table, and the bond market will not curtail the massive run we’ve seen over the last two years in the equity markets, said John Kerschner at Janus Henderson Investors.
What’s Next?
The so-called core consumer price index — which excludes food and energy costs — increased 0.2% in December, marking the first stepdown in the rate in six months. From a year ago, it rose 3.2%. That’s still above the Fed’s 2% target.
The data provides a sigh of relief for the markets after coming in largely aligned with expectations, said Rajeev Sharma at Key Wealth. However, inflation data coming in line is not enough good news for the Fed to forget the strength of the job market and, in turn, should not be enough for the market to start anticipating a larger number of rate cuts for 2025.
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