Investors stampeded back into stocks Thursday, and sent bond yields to their biggest daily decline in more than a decade, after U.S. consumer price data suggested the Federal Reserve may be reaching a turning point in its battle against stubborn inflation.
The Labor Department’s annual consumer price index fell below 8% for the first time in eight months, coming in well below economists’ expectations. Credit market implied probabilities for how aggressive future rate hikes will be by the U.S. Federal Reserve were immediately ratcheted lower. With the Canadian economy closely tied to its neighbour to the south, traders also began to price in more modest moves by the Bank of Canada.
“The cool inflation print should mean the beginning of the end for inflation fears, and the Fed will feel much more comfortable ramping down,” Stephen Innes, Managing Partner of U.S. wealth management company SPI Asset Management, said in a note. “Indeed, this is the kind of number that lifts all ships, as investors were not even close to being positioned for this type of inflation retreat.”
Both Wall Street and Bay Street saw their biggest advance since April 2020. The S&P 500 jumped 5.5% and the Dow Jones Industrial Average rose just over 1,200 points. The tech-heavy Nasdaq, which is particularly sensitive to the path of interest rates, rallied 7.3%. The Canadian benchmark stock index rose 3.3%, closing at its highest level since Aug. 25.
Even bitcoin surged, recovering nearly all its losses from Wednesday when a failed buyout for a troubled cryptocurrency exchange sent shockwaves through the sector.
The U.S. consumer price index rose 0.4% in October after climbing by the same margin in September. Economists were expecting CPI would advance 0.6%. In the 12 months through October, the CPI increased 7.7% after rising 8.2% on the same basis in September. Soaring rents accounted for more than half of the increase in the CPI. Gasoline prices rebounded after three straight monthly decreases. While food prices increased 0.6%, the pace was much slower relative to prior months
Excluding the volatile food and energy components, core CPI increased 0.3% last month after gaining 0.6% in September.
“The main message is that, yes the core reading was good and the peak may be officially in, but it is way too early to be holding the victory parade,” said Douglas Porter, CFA, Chief Economist with BMO Capital Markets.
Market bets of a 50-basis point rate hike in December, rather than a 75-basis point hike, jumped to about 85% from 52%, according to the CME FedWatch tool.
For the next Bank of Canada policy meeting on Dec. 7, the market is now pricing in a 73% probability of a 25-basis-point hike in its overnight rate, versus 54% odds prior to the data, as bets of a larger 50-basis-point hike declined, according to Refinitiv Eikon data.
The U.S. 10-year Treasury yield dropped about 30 basis points to a five-week low of 3.813%, its largest daily fall since March 2009. Canada’s five-year government bond - influential in the setting of mortgage rates - fell 26 basis points to 3.336%. The U.S. dollar plummeted, sending the Canadian dollar up 1.2% to a seven-week high of 74.79 cents US.
Lower bond yields and expectations central banks are nearly at the end of their rate-hiking cycle provided a shot of confidence to market bulls who have been arguing the recovery in equity markets is only in its early stages. But most agreed several more months of declining inflation numbers would be needed to confirm the trend.
“If this downward trajectory for inflation holds, then you can make a strong case that the bottom is in place for U.S. equities, said Edward Moya, Senior Market Analyst, The Americas for OANDA, a retail foreign exchange dealer. “This inflation was a good sign that the Fed is on the right path for winning this war with inflation, but there will still be a lot of variables thrown its way over the next couple of quarters.”
Derek Holt, Vice-President & Head of Capital Markets Economics, Scotiabank, cautioned that month-over-month annualized inflation readings showed progress in previous reports this year, only to met with higher numbers in subsequent months.
“I think the massive market reaction is a combination of a hope-driven rally and positioning squeeze much more than is sensible with the modest new evidence at hand,” he said in a note.
David Rosenberg, founder of Rosenberg Research, said he sees more declines ahead for bond yields as economies slow, but he remains decidedly bearish on stocks. “The breadth of the [consumer] price weakness was remarkable and the lags from sharply higher interest rates and the soaring U.S. dollar are only now percolating through the system,” he said in a note. “The instant reaction will fade [in equities] as the reality of diminished corporate pricing power and earnings downgrades come to the fore — the major theme for 2023.”
The advance in equities was broad across sectors, but one-time Wall Street darlings tarnished in 2022′s bear market were among Thursday’s strongest performers, with Nvidia jumping about 14%, Meta Platforms climbing 10% and Alphabet rising 7.6%. The technology sector led the advance in the S&P/TSX Composite index, rallying nearly 8%, as Shopify gained 16.4%.
The Toronto market’s materials group, which includes precious and base metals miners and fertilizer companies, added 5.2% as gold and copper prices rallied. Energy was up 2.5%, with U.S. crude oil futures settling 0.8% higher at $86.47 a barrel.
Among individual names, CAE Inc CAE.TO> shares soared 18.2% after the company posted quarterly revenue and profit above analyst estimates, as demand for flight simulators at its civil aviation and defense units surged.
The S&P 500 remains down about 17% year to date. The TSX is down a more modest 5.8% thanks largely to its heavy weighting in resource stocks.
With reports from Reuters
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.