Wall Street rallies as cooling inflation eases rate hike fears

New York: Wall Street rallied to close more than 1 per cent higher on Wednesday after data showed US inflation slowed more than expected in July and raised hopes the Federal Reserve will become less aggressive on interest rates hikes.

A sharp drop in the cost of gasoline helped the US Consumer Price Index stay flat last month after advancing 1.3 per cent in June, the Labour Department said. The CPI rose by a less-than-expected 8.5 per cent over the past 12 months after a 9.1 per cent rise in June.

The data was the first notable sign of relief for Americans who have watched inflation steadily climb the past two years.

Fed funds futures traders are now pricing in only a 43.5 per cent chance that the US central bank hikes rates by 75 basis points when it meets in September, compared with 68 per cent before the data. A 50 basis point hike is seen as a 56.5 per cent probability.

“For the market, it’s sort of a Goldilocks scenario right now because you have the labor market holding up and inflation potentially starting to come down. That is what a soft landing would 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 an all-clear signal, Snyder said.

“They’re going to need to see a sustained trend, and even then some, to moderate monetary policy that could potentially lead to a recession,” he said.

The rally on Wall Street was broad-based, with all 11 S&P 500 sectors rising in a sea of green. Growth stocks rose more than value, while Dow transports, small caps and semiconductors also rose.

According to preliminary data, the S&P 500 gained 86.29 points, or 2.09 per cent, to end at 4,208.76 points, while the Nasdaq Composite gained 356.19 points, or 2.85 per cent, to 12,850.12. The Dow Jones Industrial Average rose 532.93 points, or 1.63 per cent, to 33,307.34.

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

Producer prices data for July on Thursday along with August inflation and employment data for release next month could alter the course of the Fed again, Frederick said.

The Fed has hiked its policy rate by 225 basis points since March despite fears the sharp rise in borrowing costs could tip the US economy into a recession.

The slowing of 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 plenty more work to do.

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

The CBOE Volatility index, Wall Street’s fear gauge, fell below the 20.00 level, hitting its lowest since April.

High-growth and megacap technology stocks, whose valuations are vulnerable to rising bond yields, rose as Treasury yields fell sharply across the board. Apple Inc, Alphabet Inc and Amazon.com Inc rose more than 2 per cent each.

Economy-sensitive banks advanced, with Goldman Sachs Group Inc and Morgan Stanley climbing about 3 per cent each.

“Banks have underperformed and are now getting bid,” said Thomas Hayes, managing member of Great Hill Capital LLC, adding that investors are chasing the laggards that have not participated in the rally since June lows.

Tesla Inc rose after Elon Musk sold $6.9 billion worth of shares in the electric vehicle maker to finance a potential deal for Twitter Inc if he loses a legal battle with the social media platform. Twitter also gained.

Meta Platforms Inc jumped after the Facebook-parent said on Tuesday it had raised $10 billion in its first-ever bond offering.