Wall Street soared on Wednesday following a report indicated inflation cooled more than expected last monthsparking speculation that the Federal Reserve it may not have to be as aggressive in raising interest rates as feared.
At the closing bell, the index Dow Jones gained 1.63%, the technological Nasdaq a strong 2.89% and the S&P 500 2.13 percent.
Shares closed at three-month highs. Tech stocks, cryptocurrencies and other investments that are among the year’s biggest losers due to aggressive Fed rate hikes led gains. Treasury yields fell sharply on the inflation data as traders cut their bets on how much the Fed will raise interest rates at its meeting next month.
Much of the slowdown in inflation in July was due toto the drop in gasoline and oil prices. But even following ignoring that and volatile food prices, the so-called “Underlying inflation” remained steady last month instead of accelerating as economists had expected.
The data encouraged traders to cut bets on how much the Fed will raise interest rates at its next meeting. They now see a rise of half a percentage point as the most likely outcome, according to CME Group. A day earlier, they were betting on a more aggressive rise in 0.75 percentage pointsjust like the last two uploads.
These differences may not seem like much, but interest rates help set the direction of prices in financial markets. And higher rates tend to drive down the prices of everything from stocks to commodities to cryptocurrencies.
Bond prices soared immediately following the release of the inflation report, pushing bond yields lower. ANDThe two-year Treasury yield, which tends to track Fed expectations, fell to 3.14% from 3.27% on Tuesday.
10-year yield sank more slowly, to 2.76% from 2.78%, narrowing the gap to the two-year yield. Many investors consider this gap to be a fairly reliable sign of an upcoming recession.
Recession concerns have grown as 40-year-high inflation squeezes households and businesses around the world. The Federal Reserve and other central banks have raised rates to slow the economy in hopes of quelling inflation, but they risk stifling it if they act too aggressively.
“The path they are trying to travel is the razor’s edge”said Brian Nick, chief investment strategist at Nuveen.
There is no doubt that inflation remains painfully high, and the expectation is that it will remain so for some time. However, Wednesday’s data rejuvenated Wall Street, which reeled following a stronger-than-expected jobs report on Friday, which raised expectations of a more aggressive Fed. It reinforced hopes that a spike in inflation – and thus more aggressive rate hikes from the Federal Reserve – may be on the horizon.
“It’s a step in the right direction. but keep in mind that we have many miles to go before inflation normalizes,” said Mike Loewengart, managing director of investment strategy for E-Trade at Morgan Stanley.
The Federal Reserve will receive other highly anticipated reports before its next interest rate announcement on September 21, which might also alter your posture. Among them are reports showing hiring trends across the economy, to be released on September 2, and the next consumer inflation update, to be released on September 13.
More immediately, this week’s reports will show developments in inflation at the wholesale level and whether US households continue to lower their inflation expectations, an influential piece of information for Fed officials.
Nevertheless, Wednesday’s inflation data helped shares across Europe climb modest gains, while earlier-close markets in Asia were mostly lower. Germany’s DAX fell 1.2%, Japan’s Nikkei 225 fell 0.6% and Hong Kong’s Hang Seng lost 2%.
(With information from AP and AFP)
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