Nasdaq gains more than 7%, S&P, Dow marks best day in over two years in CPI relief rally

Wall Street’s major indices staged their best rally of the year on Thursday after data showed core and headline consumer inflation was weaker than expected in October, fueling hopes that the Federal Reserve could slow down its aggressive path of rate hikes.

The tech-heavy Nasdaq Composite (COMP.IND) provisionally closed 7.29% higher at 11,107.66 points, as rate-sensitive megacap technology firms gained across the board. The benchmark S&P 500 (SP500) added 5.50% to end at 3,954.56 points, while the blue-chip Dow (DJI) jumped 3.69% to close at 33,712.21 points.

The Nasdaq and S&P marked their best intraday performance since April 6, 2020, while the Dow notched its best daily performance since May 18, 2020.

All 11 S&P sectors ended in the green, with broad-based gains across the board. Technology was the top gainer. Heavyweight sector Consumer Discretionary rose more than 7%, helped by Amazon and other e-commerce stocks. Energy gained the least.

Bond markets also rallied on the inflation data. The 10-year Treasury yield (US10Y) ended the session down 33 basis points to 3.82%. The 2-year yield (US2Y) closed 30 basis points lower at 4.33%. Exchange traded funds linked to Treasury yields have jumped sharply higher. The dollar index (DXY) fell 2.3% to 107.96.

The 0.3% monthly rise in core CPI, compared with forecasts for 0.5%, was the softest since September 2021.

For much of this year, consumer price reports have been poorly received by the markets, as inflation has remained stubbornly high and has led to the Federal Reserve hiking rates by 75 basis points for four straight meetings.

The moderation in prices in Thursday’s report will give the Fed more breathing room in terms of slowing down their pace of rate hikes. According to the CME FedWatch tool, the markets are now pricing in a 80.6% probability of a 50 basis point hike at the central bank’s policy meeting next month.

‘Today marked the best day for the most-shorted stocks since April 2020. Thanks to today’s inflation numbers, the Fed is now expected to start cutting rates in September of 2023. This is causing stocks to fly as investors bet on a quick end to the Fed’s aggressive hiking cycle,” Seeking Alpha contributor Leo Nelissen said.

“However, this may be short-sighted,” Nelissen added. “The Federal Reserve is unlikely to pivot before inflation has come down meaningfully. The best case, for now, is a steep decline in inflation towards 2-3% in early 2023. However, that is unlikely as a steep decline in prices can only be forced through severe demand destruction. That is not bullish.”

Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management, also had some words of caution.

“We are preparing for an environment where interest rates remain higher for longer. Investors should be more concerned with the effect that rising rates into a decelerating economy has on their portfolio values rather than the current level of inflation,” Landsberg told Seeking Alpha.

“Thursday’s softer-than-expected inflation number confirms our belief that inflation is yesterday’s story. Inflation is still way above the Fed’s 2% target and we believe the Fed will keep their word and continue to raise interest rates,” Landsberg said.

San Francisco Fed President Mary Daly said the inflation report was “just one piece of positive information” and that the Fed couldn’t be complacent.

In other economic data, the number of Americans filing for weekly jobless claims rose more than expected, which also added on to the hopes of a Fed pivot.

Investors also kept an eye on cryptocurrency markets on Thursday, with the FTX saga still ongoing. A selloff in crypto weighed on the major indices the previous day.

Among other active movers, U.S. homebuilders advanced even as long-term mortgage rates re-crossed the 7% mark for the week ending November 10. D.R. Horton, KB Home, Lennar and PulteGroup all gained more than 10%. Biopharma Veru cratered after an FDA advisory committee voted against its oral COVID-19 therapy.

In earnings related news, favorably received quarterly reports sent shares of electric vehicle makers Nio and Rivian higher.