US Stocks Rally as Inflation Cools, Bolstering Fed Rate Cut Bets
September's Consumer Price Index rose 3.0%, below forecasts, sending Treasury yields lower as investors ramp up wagers on a policy pivot.
U.S. stocks surged in pre-market trading and government bond yields fell on Friday after a closely watched inflation report came in cooler than anticipated, cementing investor expectations for an imminent Federal Reserve interest rate cut.
The Bureau of Labor Statistics reported that the Consumer Price Index (CPI) rose at a 3.0% annual pace in September, just below the 3.1% consensus estimate from economists surveyed by Dow Jones. The move marked a slight moderation in the pace of price increases, providing relief to a market anxious about the central bank's next move.
Core CPI, which strips out volatile food and energy prices, also showed signs of cooling, rising 0.2% for the month and 3.0% from a year ago. The figures provided the clearest signal yet that the Fed's aggressive monetary tightening campaign is having its intended effect, giving policymakers more latitude to ease financial conditions.
The market reaction was swift and decisive. Futures tied to the S&P 500 jumped 0.8%, while those for the tech-heavy Nasdaq 100 gained over 1.0%. In the bond market, the yield on the benchmark 10-year U.S. Treasury note, which had been creeping higher in anticipation of the data, promptly fell as investors bought the debt. Yields move inversely to prices.
"This is the number investors were waiting for," one strategist at a major investment bank commented. "It gives the Fed the green light. The debate is no longer about if they will cut, but by how much they will cut by the end of the year."
Investor optimism is centered on the Federal Open Market Committee's (FOMC) upcoming meeting on October 28-29. Before the report, market pricing already reflected high odds of a policy shift. According to the CME FedWatch Tool, traders had priced in a greater than 90% probability of at least a quarter-point rate reduction. Friday's inflation data has likely solidified those bets, with Wall Street now looking for clues on the potential for further cuts in December.
The data released by the BLS gives the central bank a strong justification to begin easing policy to avoid putting unnecessary brakes on the economy. For months, the Fed has been navigating a delicate balance, aiming to quell inflation without triggering a sharp economic downturn.
While the path of inflation has been uneven, September's report offers a dose of confidence that the trend is headed in the right direction. This development is particularly welcome news for growth-oriented sectors like technology and consumer discretionary, which are sensitive to changes in interest rate expectations. Lower rates reduce borrowing costs for companies and can boost equity valuations by making future earnings more valuable.