Inflation Data Boosts Stocks

U.S. stocks rose on Thursday after the latest inflation data showed prices falling for the sixth straight month. This is likely to keep the Federal Reserve from raising interest rates too quickly.
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The S&P 500 and Dow Jones Industrial Average both rose today, with the S&P 500 up 0.5% and the Dow up 0.9%. The Nasdaq Composite, which is heavily weighted towards technology stocks, also rose 0.6%. After trading flat for much of the morning, all three indexes gained steam and moved higher midday.
In December, consumer-price inflation slowed to 6.5%, down from 7.1% in November, according to the Labor Department. Although this was largely in line with economists’ expectations, one measure of services inflation—excluding energy services and the cost of owning or renting a home—offered encouragement that tighter monetary-policy is proving effective.
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Supercore inflation, which is especially sensitive to labor costs, rose at a 3% annualized rate in the most recent quarter, below the pace seen last year. Many economists have noted that it is normal to see a delay in housing prices falling substantially.
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The data led traders to believe that the Fed is likely to slow its pace of interest rate hikes at its next meeting. Most analysts expect the central bank to raise its benchmark rate target by a quarter of a percentage point to a range between 4.5% and 4.75% on February 1.
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The data is not all good or bad, it is a mix of both, said Andrew Patterson, senior economist at Vanguard. Mr. Patterson added that he will be closely watching Fed officials’ comments between now and the end of the month to get a better sense of where the Fed might be headed.
Thursday's rally pushed the S&P 500's gains for the month to around 4%. Energy stocks were the best performers of the index's 11 sectors, rising more than 2.2% alongside higher oil prices.
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Investors are buying U.S. Treasurys in hopes that interest rates will be lower than what central bankers are predicting. This has caused bond prices to rise and yields to fall. The yield on the 10-year U.S. Treasury note is now 3.482%, down from 3.554% on Wednesday. The yield on the two-year note, which is more sensitive to changes in monetary policy, has fallen to 4.153% from 4.226%.

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According to market-based expectations, the Fed is expected to cut rates by roughly a half-percentage point in the latter half of the year. However, some policy makers have pushed back on the possibility of any rate decreases in 2023, saying that borrowing costs will have to stay high for some time in order to bring down inflation.
"The market is working against the Fed's goals," said Lyn Graham-Taylor, senior rates strategist at Rabobank. "Easing financial conditions is the opposite of what the Fed wants," he said.
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Investors around the world are betting that a less aggressive Federal Reserve will be good news for assets that have been hurt by the support rising rates have provided for the dollar.
The yen rose 2.2% against the greenback on speculation that the Bank of Japan could retreat from its ultra-lenient monetary policy. Gold futures jumped 1% to $1,898.60 a troy ounce, set for their highest close since April 2022.
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The dollar continued its recent decline, losing 0.8% and falling nearly 10% over the past three months. Speculators have been betting against the dollar and in favor of gold lately, hoping for a reversal of 2022’s performances.
Options traders were relieved after the print, seeing fewer catalysts to jostle stocks on the horizon. The Cboe Volatility Index, or the VIX, extended its longest lull since late 2021 by falling below 20—a key level typically seen as signifying lack of worry or complacency—to 19.1.
Airline stocks were given a boost by American Airlines' improved earnings guidance, which sent shares 6.5% higher. This positive news came from elsewhere and caused stocks to rise.

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Brent crude oil futures rose 1.7% to $84.05 a barrel on Wednesday. U.S. natural gas futures also climbed 4.7% to $3.50 per million British thermal units.The gains in both energy commodities came as investors reacted to data showing a decline in U.S. crude stockpiles and a rise in demand for natural gas.
European markets were broadly higher on Wednesday, with the Stoxx Europe 600 index extending its strong start to the year.Real-estate and auto stocks were among the biggest gainers on the day.
In Asia, Hong Kong's Hang Seng rose 0.4%. Japan's Nikkei 225 was flat, while the Shanghai Composite Index rose less than 0.1%.