Stocks hit new peak as CPI fuels rate cut bets: Market over

(Bloomberg) — Stocks rose to record highs on bets the Federal Reserve will slash interest rates again next month following inflation data.

Stocks were higher in afternoon trading in New York, with the S&P 500 on pace for its 52nd new high this year. Short-term Treasuries outperformed the market, with two-year Treasury yields falling from their highest levels since July. Swaps dealers have raised the probability of another Fed rate cut on December 18 to about 80%. The dollar remains at two-year highs. Bitcoin breaks through $92,000.

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The consumer price index, which was in line with expectations, went some way to easing concerns among traders who feared hotter data could hamper U.S. policy easing. Minneapolis Fed President Neel Kashkari said he believed inflation was “moving in the right direction” based on aggregate data. Speaking on Bloomberg Television minutes after the data was released, he emphasized that he could not yet view the data in detail.

“Overall, it’s a very consistent outcome, with a rate cut in December being the most likely outcome,” said Ian Lyngen of BMO Capital Markets.

The S&P 500 rose 0.4%. The Nasdaq 100 rose 0.2%. The Dow Jones Industrial Average rose 0.5%.

The 10-year Treasury yield was little changed at 4.44%. The Bloomberg Dollar Spot Index rose 0.3%.

“Higher-than-expected inflation data could convince the Fed to hold on unchanged at its next meeting,” said Seema Shah of Principal Asset Management. “A rate cut in December is still a possibility.”

While Wednesday’s CPI report provided some relief, the latest data also underscored the slow and frustrating nature of the fight against inflation, which has frequently moved sideways on a broader downward path – sometimes for months at a time. .

Josh Jamner of ClearBridge Investments said: “Data consistent with the Consumer Price Index show that while substantial progress has been made in combating rising inflation, the ‘last mile’ is more challenging. “Underlying inflationary pressures remain slightly above the Fed’s 2% target, and the market narrative should not change significantly as a result of today’s data.”

Bank of America Corp.’s Stephen Junod, Megan Swiper and Alex Cohen said it’s a “business as usual” print for the Fed.

“Year-over-year inflation is moving sideways, but there is nothing in today’s report that would shock the Fed,” they said. “As such, a quarter-point rate cut in December remains our base case.”

Economists at Citigroup maintain their view that the Fed will cut interest rates by 50 basis points in December after the CPI data is released.

“While the details remain fluid and less ‘normal,’ easing wage pressures, declining short-term inflation expectations, and the continued pressure on housing demand and prices by high interest rates should give Fed officials confidence that inflation is moderating,” Citi wrote. Feel reassured.” Veronica Clark and Andrew Hollenhorst.

Morningstar’s Preston Caldwell said that while the possibility of an external “jump” remains, he still thinks the central bank is likely to cut interest rates next month.

After last week’s sharp rate cut, Federal Reserve Chairman Jerome Powell sought not to provide forward guidance on the future direction of interest rates, leaving options open at the December meeting and beyond. He emphasized that because the economy is strong, officials can slowly lower interest rates. He also said that even after the November rate cut, policy remained restrictive and policymakers were cutting interest rates to neutral levels.

“Last week, Chairman Powell emphasized that the Fed believes its policy stance remains restrictive and remains on track to cut rates,” said Lauren Goodwin of New York Life Investments. “We agree with current market expectations for Fed pricing ”

With inflation remaining stubbornly above the Fed’s 2% target, the Fed may only have one more rate cut left in December before pausing, said Skyler Weinand of Regan Capital.

“The incredible move in the stock market after the election effectively eased financial conditions,” he said. “This easing, combined with the coming fiscal stimulus, may require the Fed to pause on rate cuts in the near future to let the dust settle and process more incoming data.”

The Fed’s cuts to short-term interest rates and future fiscal stimulus could reignite inflation and provide a reason for higher long-term rates, he said, adding that he expected the 10-year Treasury yield to climb to 5% in 2025.

In fact, a recent survey conducted by 22V Research ahead of the CPI release showed that the share of investors expecting a recession fell, while the share saying financial conditions needed to tighten rose to the highest level since June 2024 .

Ellen Zentner of Morgan Stanley Wealth Management said markets are already weighing the possibility that the Fed will cut interest rates less than previously expected in 2025 and could hit the pause button as early as January.

“The sticky component of inflation continues to ease, providing some leeway for the Fed to cut interest rates next month, but it will likely be paused in January,” said Jeffrey Roach of LPL Financial. “As consumer spending continues, Not yet slowing down, strength among some consumer groups is putting upward pressure on prices and stronger-than-expected economic growth could keep bond yields high.”

Diana Iovanel of Capital Economics said that while investors were dismissive of the latest news on U.S. inflation, they appear increasingly worried about its longer-term outlook.

“We agree with them and expect further gains in Treasury yields,” she said.

Lindsay Rosner of Goldman Sachs Asset Management said the latest CPI eased concerns that the pace of interest rate cuts was about to slow, following an unusually hot set of data.

“Nonetheless, with fiscal and trade policy uncertainties high, the Fed may choose to slow down the pace of easing as the New Year’s cold snap approaches,” she noted.

“After the big gains we saw in stocks, investors are looking for any excuse to trigger a pullback,” said eToro’s Bret Kenwell. “A batch of live inflation data is unlikely to do the trick.

Kenwell said the post-election market run higher has instilled a “buy the dip” mentality on Wall Street. Kenwell concluded that if the market sells off in the short term, the pullback is likely to be mild as fund managers buy the dip and look to chase performance at the end of the year.

“It’s time to stop worrying about the Fed and inflation,” said TradeStation’s David Russell. “The stock market has been on autopilot since the election, and today’s data has no impact on that trend. December remains to be seen reduce.”

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