US Stocks Jump On Signs of Cooling Inflation

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US stocks jumped and the dollar weakened on Tuesday after a wholesale inflation gauge moved slower than expected last month, reinforcing hopes that the Federal Reserve’s next rate rises could be smaller.

Earlier this week, the Producer Price Index (PPI), which measures wholesale inflation, increased by 0.2 percent, below the 0.4 percent rise expected by expert economists surveyed by Bloomberg earlier last month.

Following the wholesale inflation fall from 8.4 percent in September to 8 percent in October, Wall Street’s S&P 500 rose 1.3 percent in early trading.

The rise means the S&P 500 has gained more than 11 percent since it hit its intraday low in the second week of October.

As the broad market index advanced 9 percent, the tech-heavy Nasdaq Composite rose 1.5 percent, and the Dow Jones Industrial Average gained 0.1 percent after increasing as much as 450 points earlier on Tuesday.

Such gains and the lighter-than-expected inflation report have bolstered investors’ hopes that the Fed will slow down interest rate hikes. The monetary policy’s tightening was intended to combat rising inflation, but weighed on stocks and raised the US dollar.

According to OANDA senior market analyst Edward Moya, the new economic data support the idea that inflation is coming down fast.

Bleakley Financial Group chief investment officer Peter Boockvar also stated that such data is “further confirmation of the peak for now in inflation,” adding that experts have seen that evidence for months.

Tuesday’s figures also showed that high inflation did not affect consumer spending. American multinational retail corporation Walmart reported higher-than-forecast quarterly sales and raised its profit projection as the holiday shopping season comes.

In response, the company’s shares soared. Other leading retailers, such as Amazon and Target, also saw their shares rise sharply.

Also, as another indicator that inflation had started to ease, the dollar index fell 0.2 percent, continuing a major decline after peaking in September.

The index, which tracks the US currency against six other currencies, also showed that the euro, yen, and pound had risen against the dollar.

Meanwhile, US government bond markets rallied, with the yield on two-year US Treasuries at 4.38 percent after slipping 0.02 percentage points.

Moreover, the yield on the benchmark 10-year US note fell 0.04 percentage points to 3.82 percent. Such yield falls occur when prices rise.

In a statement issued Tuesday, President Joe Biden said there was “good news” for the country’s economy and some signs that inflation was subduing.

However, some analysts say that optimism about Wall Street’s recent earnings is “unjustifiable.”

According to Goldman Sachs analysts, daily S&P 500 returns of over 2 percent are not uncommon during bear markets. Therefore, the rally in bonds and risk assets is “likely overdone,” they added.

The bank’s experts also said that while a higher-than-expected inflation restart could support a slowdown in the rate increase pace, hike cycle extension risks could remain.

Fed officials have also tried to dampen investor enthusiasm by advocating a tighter monetary policy.

Speaking at an event in Australia on Monday morning, Fed Governor Christopher Waller said the worst thing the Fed could do was stop and then restart its work to raise interest rates.

Mr. Waller insisted that there was still a long way to go to reduce inflation and urged all parties to “take a deep breath” and “calm down.”

Many also expect the Fed to move interest rates more slowly and assess the increases’ effects. In its last four meetings, interest rates have been raised by three-quarters of a percentage point.

However, on Monday, Fed Vice Chairman Lael Brainard said a slower pace of interest rate hikes did not suggest the central bank planned to slow down its efforts to fight inflation.

October’s better-than-expected inflation was only “preliminary,” she added.

US stocks were also boosted in Tuesday morning trading by Asian markets’ solid gains after President Biden met Chinese leader Xi Jinping ahead of the G20 summit in Bali. Both expressed their desire to improve relations between the two nations and ordered their teams to define the actions to achieve that goal.

Following the three-hour meeting, Hong Kong’s Hang Seng Index rose 4.1 percent, China’s CSI 300 gained 1.9 percent, Japan’s Topix climbed by 0.4 percent, and Korea’s Kospi South increased by 0.2 percent. The regional Stoxx Europe 600 also added 0.3 percent on Tuesday.