Stocks rose while bond yields fell as an unexpected slowdown in inflation increased expectations that the Federal Reserve's aggressive rate-hiking cycle has concluded, and the next move might be a cut in mid-2024.
Over 95% of S&P 500 companies saw gains, leading to a 2% increase in the index. Megacaps like Tesla Inc. and Nvidia Corp. experienced notable increases. Financial shares, particularly regional banks, surged by 7%. The Russell 2000 index of small caps saw a more than 4% climb, the most significant in a year. Meanwhile, Treasury two-year yields dropped around 20 basis points to 4.85%, and the dollar depreciated by 1%. Fed swaps reflected a 50 basis points likelihood of easing in July.
The inflation report contributed to the "Goldilocks narrative," suggesting the economy's resilience and disinflation may prompt the Fed to ease policy in 2024. The core consumer price index, excluding food and energy costs, rose by 0.2% from September, a preferred gauge for underlying inflation. Chris Zaccarelli at Independent Advisor Alliance believes the market will continue to rally as investors accept the idea that higher rates are unlikely.
According to Bryce Doty at Sit Fixed Income Advisors, those unconvinced the Fed is finished are likely conceding, with the next anticipated Fed action being a cut in the summer of the following year rather than another rate hike.
The decline in inflation indicates that recent monetary policies have been effective, increasing the likelihood of a "soft landing," as noted by Richard Flynn at Charles Schwab UK. Neil Dutta, head of economics at Renaissance Macro Research, sees the inflation data as "soft-landing nirvana" for equity markets, reinforcing the idea that officials will hold off on further rate hikes.
November has seen equities rally on the belief that the Fed has concluded rate hikes, with the S&P 500 up over 7%, heading for its best month since October 2022. Historically, when the S&P 500 was up 5% or more by mid-November, the remainder of the year was positive, according to Bloomberg data.
Investors, according to the latest Bank of America Corp. fund manager survey, are turning bullish on bonds, anticipating lower rates in 2024. Pimco, among those disappointed with this year's rally expectations, is renewing the call for 2024, stating that bonds are exceptionally attractive compared to stocks.
Traders are closely monitoring Fed speakers for insights on the latest data and its implications for the central bank's future actions. Fed Bank of Richmond President Thomas Barkin expressed skepticism about inflation reaching the central bank's 2% target despite recent progress in curbing price pressures. Meanwhile, Bank of England Chief Economist Huw Pill emphasized the need for "restrictive" interest rates in the UK to counter the risk of persistent inflation.
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