Stocks climb as Wall Street cheers cooler inflation report

By STAN CHOE
AP Business Writer

NEW YORK (AP) — Wall Street is climbing Tuesday after a report showed inflation cooled more than expected last month, raising the chances that the economy can avoid a recession.

The S&P 500 was 1.6% higher in morning trading, adding to its last-hour rally from a day earlier built on anticipation of the inflation data. The Dow Jones Industrial Average was up 284 points, or 0.8%, at 34,289 nearly an hour into trading, while the Nasdaq composite was 2.5% higher. Besides stocks, prices also leaped for everything from bonds to gold to bitcoin, though gains moderated across markets as the morning progressed.

The source of Wall Street’s relief was data showing that U.S. inflation slowed to 7.1% last month from 7.7% in October and more than 9% in the summer. Even though inflation remains painfully high, and shoppers continue to pay prices well above levels from a year ago, Tuesday’s report offers hope that the worst of inflation really did pass during the summer.

More importantly for markets, the slowdown cements investors’ expectations that the Federal Reserve can ease up on its aggressive hikes to interest rates.

Such increases slow the economy by design, in hopes of cooling conditions enough to get inflation under control. But they also risk causing a recession if rates go too high, and they push down on prices for stocks and all kinds of other investments in the meantime. Smaller hikes to interest rates would mean less added pain to both the economy and to markets.

Tuesday’s inflation report is the final piece of data the Federal Reserve will get before it announces its next move on interest rates Wednesday. The widespread expectation is that it will hike its key overnight rate by 0.50 percentage points.

Usually, that size of an increase would be a big deal because it’s double the typical move. But with inflation coming off its worst level in generations, it would be a step down from the four straight mega-hikes of 0.75 percentage points the Fed has approved since the summer.

Expectations for an easier Fed meant some of Wall Street’s wildest action Tuesday was in the bond market, where yields tumbled immediately after the inflation report’s release.

The yield on the 10-year Treasury, which helps set rates for mortgages and other important loans, fell to 3.46% from 3.62% late Monday. The two-year yield, which more closely tracks expectations for the Fed, plunged to 4.17% from 4.39%.

Other central banks around the world, including the European Central Bank, are also likely to raise their own rates by half a percentage point this week.

The inflation report changed enough minds on Wall Street that many traders are now betting the Fed’s key overnight rate will peak at a range of 4.75% to 5% next year. Just a day earlier, the majority of bets said overnight rates would rise to at least a range of 5% to 5.25%. Those rates started this year at virtually zero.

Expectations for a slowdown in rate hikes may be setting some investors up for disappointment, though. Even if the Fed is moving at smaller increments each time, it may still ultimately take rates higher than markets expect.

Some investors also continue to make moves in anticipation of the Fed cutting interest rates during the second half of 2023. Rate cuts generally act like steroids for stocks and other investments, but the Fed has been insisting it plans to hold rates at a high level for some time to ensure the battle against inflation is won.

And even if inflation is indeed on its way down, the global economy still faces threats from the rate increases already pushed through. The housing industry and other businesses that rely on low interest rates have shown particular weakness, and worries are rising about the strength of corporate profits broadly.

Stocks gave back some of their initial morning gains as analysts cautioned investors not to get carried away with Tuesday’s encouraging data. The S&P 500 was up as much as 2.8% just after the report’s release, while the Dow’s gain more than halved from its initial burst of 707 points.

Still, the overriding emotion on Wall Street remains relief as economists called the inflation data “cool” in more ways than one.

A measure of fear among stock investors, which shows how much they’re paying for protection from upcoming swings in prices, eased by more than 11%.

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AP Business Writer Elaine Kurtenbach contributed from Bangkok and AP Business Writer Matt Ott contributed from Washington.