Stocks surged in a buy-everything relief rally after slower-than-projected price growth spurred bets the Federal Reserve can downshift its aggressive rate-hike path.
The S&P 500 climbed 5.5% for the best first-day reaction to a CPI report since at least 2003 when records began. About 96% of stocks in the benchmark were in the green, the broadest advance since Oct. 4, according to Bloomberg data. The rally caught short-sellers wrong-footed, helping spur the outsized gains.
Crypto markets stabilized despite the turmoil surrounding crypto exchange FTX.
Headline inflation came in at 7.7%, the lowest since January, before Russia's war in Ukraine pushed up commodity prices. More important for the Fed, the core measure that excludes food and energy slowed more than anticipated.
Thursday's intense rally only partially clawed back steep losses this year for risk assets hammered by Fed's tightening. The S&P 500 is still down 17% in 2022 and the Nasdaq 100 is off nearly 30%, with both headed for their worst years since 2008.
Treasuries soared across the board, sending the rate on two-year notes, more sensitive to monetary policy, down 28 basis points. Rates traders pared bets on Fed hikes, with swaps indicating now that a 50-basis-point increase in December is far more likely than a 75-basis-point move.
"The first downside surprise in inflation in several months will inevitably be received by an equity market ovation," Seema Shah, chief global strategist at Principal Asset Management, wrote. "A 0.5% hike, rather than 0.75%, in December is clearly on the cards but, until we have had a run of these types of CPI reports, a pause is still some way out."
Fed officials appeared to back a downshift in rate hikes after a stretch of four jumbo-sized increases. They also stressed the need for policy to remain tight.
Dallas Fed President Lorie Logan said it may soon be appropriated to slow the pace to better assess economic conditions. San Francisco's Mary Daly said the moderation was "good news," but noted "one month of data does not a victory make." She also said "pausing is not the discussion, the discussion is stepping down."
