After inflation dropped more than anticipated last month, anticipation that the Federal Reserve may not need to be as aggressive in raising interest rates as feared, stocks on Wall Street surged on Wednesday.
As of 12:30 p.m. Eastern Time, the S&P 500 was up 73 points, or 1.8%, at 4,196, after a general rise that got underway after news that the nation’s largest economic problem, inflation, had slowed to 8.5% at the consumer level in July from 9.1% in June.
Some of the day’s greatest wins were technology companies, cryptocurrency, and other assets that had been hammered particularly hard this year.
The Nasdaq composite, which has a lot of expensive-looking, high-growth firms, has been especially exposed to interest rate changes.
The Dow Jones Industrial Average was up 457 points, or 1.4%, at 33,231, while Bitcoin increased 3.3% to over $24,000.
Although it remained down by about 60% for 2022, Netflix, a once-high-flying and high-growth company that has plummeted to be this year’s worst in the S&P 500, was up 5%.
Increasing expectations for reduced inflation
Lower costs for gasoline and oil were mostly to blame for July’s decline in inflation.
However, even after excluding gas costs and the erratic price of food, core inflation remained constant last month as opposed to rising as predicted by experts.
The information prompted traders to reduce their wagers on how much the Federal Reserve would increase interest rates at its next meeting.
According to CME Group, they now believe that a rise of 0.5 percentage points is the most probable result.
They had projected an even more aggressive rise of 0.75 percentage points the day before, matching the previous two hikes.
Although these variations may not seem significant, interest rates influence pricing on several financial markets.
Additionally, higher rates have a tendency to drive down the price of everything from equities to commodities to cryptocurrency.
Even if the announcement of a slowing rate of inflation has boosted stock markets, economists predict that the Fed will continue with its aggressive hiking plans.
Researchers at Morgan Stanley said in a note that “even though the core aggregate slowed down significantly from the previous month, Fed policymakers are unlikely to take this data as a signal to depart from their sharp tightening path we predict through the end of this year.”
Bond prices surged on the announcement of the inflation data, driving down rates.
The yield on the two-year Treasury, which often mirrors Fed predictions, dropped from 3.27% to 3.10% by late Tuesday.
The gap between the 10-year yield and the two-year yield has shrunk as the 10-year yield dropped more gradually, to 2.74% from 2.78%.
Many investors consider such a gap to be a reasonably accurate indicator of an impending recession.
Concerns of a global recession have grown as people and businesses are being squeezed by the greatest inflation in 40 years.
In an effort to combat inflation, the Fed and other central banks have been raising interest rates to slow the economy; but, if they do so too quickly, they run the danger of choking off the economy.
Uncomfortably high inflation is still present, and it is anticipated that this situation will persist for some time.
However, Wednesday’s numbers revived Wall Street, which had slumped after Friday’s stronger-than-expected employment report that increased hopes for a more aggressive Fed.
It raised expectations that the Federal Reserve’s most ferocious rate rises may be nearing their top in terms of inflation.
However, bear in mind that there is still a long way to go until inflation returns to normal, said Mike Loewengart, managing director of investments strategy at E-Trade from Morgan Stanley.
Before making its next interest rate decision on September 21, the Federal Reserve will get a couple more eagerly awaited news that might possibly change its attitude.
They include statistics on employment patterns for the whole economy that are expected on September 2 and the next consumer inflation report on September 13.
More immediately, reports this week will reveal how wholesale inflation is faring and if American people are continuing lowering their expectations for future inflation, two key pieces of information for Fed policymakers.