Markets Were Primed to Surge as Inflation Report Hit

Investors were waiting, hoping for a day like today. 

After a year of surging inflation and multiple interest rate hikes, they were wound up, ready for a sign that price increases may slow.  

Today’s consumer price index data, which showed the smallest increase in the core consumer prices in over a year, was that sign. 

The 0.27% increase in the core CPI from September to October translates into an annualized gain of 3.3%—well below recent inflation readings of 6% to 8%. 
 

All of a sudden, the “inflation has peaked” narrative is in play, and the rally is on. 

Today’s big moves—the S&P 500 climbed 5.5% while the Nasdaq gained 7.3%—reflect pent-up demand for financial assets. Investors want to buy stocks that have tumbled 25% or more from their highs. They want to buy risk-free bonds with interest rates of 4% to 5%.  

These would have been considered bargains not too long ago. But high inflation, which seemed to become more entrenched with every passing month, was holding investors back. 

Until today.  

Stocks Up, Dollar Down 

Everything from the SPDR S&P 500 ETF Trust (SPY) to the Invesco QQQ Trusts (QQQ) and the iShares 20+ Year Treasury Bond ETF (TLT) soared. 

The respective 5.5%, 7.4% and 3.9% gains on those funds are the largest since the COVID-19 crash of 2020.  

Harder-hit funds, like the ARK Innovation ETF (ARKK) and even the iShares MSCI Germany ETF (EWG), are up more—15% and 6.9%, respectively. 

The prospect of smaller price increases in the U.S. is reverberating globally. The U.S. has exported inflation to the rest of the world through the soaring U.S. dollar, which hit a 20-year high in September, and is used to price key commodities like oil and wheat. 

If the dollar drops due to lower inflation and interest rates in the U.S., other countries could see some price relief as well.  

The dollar dropped the most in 13 years: the U.S. Dollar Index slid 2.4%, its biggest decline since 2009. 

Not Out of the Woods  

To be sure, the latest CPI report is just one data point. Price increases slowed in March and July, before the rate jumped in subsequent months. 

Consecutive months of slower price gains are required before victory can be declared in the fight against inflation. 

Still, the market isn’t going to wait around to find out whether this turn in inflation is sustainable or not. Prices move well ahead of fundamentals. It happened this past summer, when the S&P 500 rallied 17% from June to August on the hope that inflation had peaked.  

 
It’s easy for investors to feel optimistic because the U.S. economy has continued to hold tough in the face of high inflation and aggressive rate hikes. The economy grew solidly in the third quarter and the unemployment rate continues to hover near multidecade lows. 

If price increases can be slowed soon, then a soft landing becomes increasingly likely.

The market is now expecting the Fed will slow the pace of interest rate hikes starting in December. Instead of raising rates by 75 basis points, as it’s done over the last four meetings, data points to a likelihood of a 50 basis point increase. 

One more CPI report will be released the day before the Fed makes its next rate decision, so the “inflation has peaked” narrative can either be reinforced or shattered at that time.  

The Fed makes its next rate decision on Dec. 14, while the CPI data for the month of November comes out on Dec. 13.