(Bloomberg) — Wall Street breathed a sigh of relief after a surprise slowdown in inflation spurred a stock rally and a plunge in bond yields, reinforcing bets the Federal Reserve is on track to keep cutting rates this year.
Equities erased their losses for 2025, with the S&P 500 up about 2% in its biggest gain since the aftermath of the US election. 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. Commodities roared, with oil topping $80 a barrel. 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.
The US CPI rose in December by less than forecast, reinvigorating bets the Fed will slash rates sooner than previously thought. Swap traders are back to fully pricing in a rate cut by July. That was a quick shift after Friday’s jobs data spurred bets officials would only be able to resume policy easing in September or October. Not to mention the wagers on hikes.
“Extreme sentiment led to a powerful post-CPI move,” said Steve Sosnick at Interactive Brokers. “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.”
To Tina Adatia at Goldman Sachs Asset Management, while the latest CPI release is likely insufficient to put a January rate cut back on the table, it strengthens the case that the Fed’s cutting cycle has not yet run its course.
“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.
The S&P 500 rose 1.8%. The Nasdaq 100 climbed 2.3%. The Dow Jones Industrial Average added 1.7%. A Bloomberg gauge of the “Magnificent Seven” megacaps rallied 3.7%. The Russell 2000 advanced 2%. 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.
As risk takers resurfaced, the market’s “fear gauge” — the VIX — collapsed the most this year. A Goldman Sachs basket of money-losing tech companies jumped 3.2%, while a group of most-shorted shares added 3.8%. Bitcoin hovered near $100,000.
The yield on 10-year Treasuries declined 14 basis points to 4.65%. The Bloomberg Dollar Spot Index fell 0.2%. Oil remained higher even after news that Israel and Hamas agreed to a ceasefire deal, bringing at least a temporary halt to the war in Gaza.
At the very least, 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.
At Evercore, Krishna Guha says the CPI print reinforces the view that the market has “overtraded” the inflation story since the start of the year on limited new information — and should be risk-on.
“It reinforces the base case for two Fed cuts, and keeps open the possibility of a March cut,” he noted.
To Ellen Zentner at Morgan Stanley Wealth Management, Wednesday’s CPI won’t change expectations for a pause later this month, but it should curb some of the talk about the Fed potentially raising rates.
“And judging by the market’s initial response, investors appeared to feel a sense of relief after a few months of stickier inflation readings.”
Indeed, 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,” Sharma noted.
The so-called core consumer price index — which excludes food and energy costs — increased 0.2% in December. That marked 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.
“We still think that it will be easy for the Federal Reserve to remain on hold for now and wait for more data and fiscal policy clarity,” said Allison Boxer at Pacific Investment Management Co. “We expect this to be the message Chair Jerome Powell aims to communicate at the January meeting.”
Fed’s Beige Book Points to Slight to Moderate Growth at Year-End
After months of elevated prints, the easing in the CPI helps restart the conversation that inflation progress has resumed — but officials will need to see a series of subdued readings to be convinced. Lingering price pressures have contributed to a deep selloff in global bond markets and fueled concerns that the Fed eased policy too quickly at the end of last year.
Fed Bank of New York President John Williams voiced confidence that inflation would continue to recede, without offering any hints on the timing of additional cuts. His Richmond counterpart Tom Barkin said fresh data show continued progress on lowering inflation, but that rates should remain restrictive. Austan Goolsbee, president of the Chicago Fed, pointed to the data as supporting his outlook for easing price pressures.
“For the Fed, this is certainly not enough to prompt a January cut,” said Seema Shah, chief global strategist at Principal Asset Management. “But, if today’s print were accompanied by another soft CPI print next month plus a weakening in payrolls, then a March rate cut may even be back on the table.”
Shah also noted that perhaps the key takeaway is that markets are likely to be “whipsawed” over the next few data releases as investors seek a narrative that they can be comfortable with for more than just a few days at a time.
To Solita Marcelli at UBS Global Wealth Management, Fed cuts are still on the table as inflation should moderate over the coming months.
“The strength of the economy remains a supporting factor for corporate earnings growth at the current level of yields,” she noted. “While volatility could make it an uncomfortable journey before the S&P 500 hits our year-end target of 6,600, we expect the equity bull market to continue and maintain our ‘attractive’ rating on US equities.”
At Nationwide, Mark Hackett says the encouraging inflation data is “bringing bulls off the sidelines.”
“Equity investors have become increasingly sensitive to moves in the bond market, with an intense focus on rates, inflation, and Fed policy,” said Hackett. “Focus will now shift to earnings, which has been a headwind in recent quarters, as we have entered earnings season with elevated expectations. Given the weakness over the past month, the odds for a positive surprise this earnings season have improved.”
Corporate Highlights:
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Goldman Sachs Group Inc. cruised past estimates as its equity traders delivered their best year on record.
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JPMorgan Chase & Co.’s traders scored their biggest fourth-quarter haul ever, boosted by volatility tied to the US elections in November.
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Citigroup Inc. said it will repurchase $20 billion worth of its stock in the coming years — unleashing billions of excess capital the bank had been keeping on hand in order to meet a key ask from shareholders.
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Wells Fargo & Co.’s expenses dropped 12% in the fourth quarter as Chief Executive Officer Charlie Scharf continues to whittle headcount as part of broader efforts to slash costs and remake the bank. The company’s shares rose.
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BlackRock Inc. attracted an annual record of $641 billion in client cash, underlining the firm’s global reach across public and, increasingly, private assets as it integrates multibillion-dollar acquisitions and reshapes its leadership.
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Bank of New York Mellon Corp.’s fourth-quarter profit topped analyst expectations after higher-for-longer interest rates boosted margins.
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Southwest Airlines Co. was sued by the US Transportation Department for allegedly violating rules that require airlines to set and meet realistic flight schedules.
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CBS owner Paramount Global’s merger with film and TV producer Skydance Media should be reviewed by federal authorities because of the participation of China’s Tencent Holdings Ltd., which was recently added to a US military blacklist, a key member of Congress said.
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NetApp Inc. has agreed to sell a portfolio of cloud software assets it acquired in recent years to Thoma Bravo-backed Flexera.
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Airbus SE Chief Executive Officer Guillaume Faury said the engine issues afflicting many of its narrowbody aircraft will continue into the first half of the year and possibly beyond, complicating the European planemaker’s outlook as it grapples with persisted supply-chain constraints.
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Pfizer Inc. sold about 700 million shares in Haleon Plc, further paring its stake in the maker of Sensodyne toothpaste.
Key events this week:
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ECB releases account of December policy meeting, Thursday
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Bank of America, Morgan Stanley earnings, Thursday
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US initial jobless claims, retail sales, import prices, Thursday
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China GDP, property prices, retail sales, industrial production, Friday
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Eurozone CPI, Friday
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US housing starts, industrial production, Friday
Some of the main moves in markets:
Stocks
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The S&P 500 rose 1.8% as of 4 p.m. New York time
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The Nasdaq 100 rose 2.3%
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The Dow Jones Industrial Average rose 1.7%
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The MSCI World Index rose 1.7%
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Bloomberg Magnificent 7 Total Return Index rose 3.7%
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The Russell 2000 Index rose 2%
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KBW Bank Index rose 4.1%
Currencies
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The Bloomberg Dollar Spot Index fell 0.2%
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The euro fell 0.1% to $1.0296
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The British pound rose 0.2% to $1.2242
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The Japanese yen rose 1% to 156.45 per dollar
Cryptocurrencies
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Bitcoin rose 3.3% to $99,583.06
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Ether rose 6.8% to $3,434.38
Bonds
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The yield on 10-year Treasuries fell 14 basis points to 4.65%
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Germany’s 10-year yield declined nine basis points to 2.56%
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Britain’s 10-year yield declined 16 basis points to 4.73%
Commodities
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Lu Wang, Natalia Kniazhevich, Sujata Rao, Margaryta Kirakosian, Julien Ponthus and Winnie Hsu.
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