CPI surprise boosts hopes Fed hiking cycle is over

Stocks climbed while bond yields sank as an unexpected slowdown in inflation bolstered bets the Federal Reserve’s aggressive hiking cycle is now over — and the next move will be a cut in mid-2024.

More than 95% of the S&P 500 companies rose, with the gauge up about 2%. Tesla Inc. led gains in megacaps and Nvidia Corp. extended its rally into a 10th straight session. Financial shares also saw a big advance, especially regional banks, which jumped 7%. The Russell 2000 index of small-caps added 4.5%. Two-year yields plunged 20 basis points to around 4.85%. The dollar fell 1%, the most since January.

The consumer price index also added to the “Goldilocks narrative,” with the economy remaining resilient and disinflation allowing the central bank to ease policy in 2024. Fed swaps indicate the odds of another hike in the current tightening cycle have fallen to almost zero — with the market now pricing in a 50 basis-point rate cut by July from the current level of 5.25% to 5.5%.

To Chris Zaccarelli at Independent Advisor Alliance, whether or not the economy can stay out of recession remains to be seen, but the market should continue to rally as investors begin to accept the view that higher rates are off the table.

“The last of investors not convinced the Fed is done are likely ‘throwing in the towel,’” said Bryce Doty at Sit Fixed Income Advisors. “The next Fed action is more likely to be a cut next summer than another rate increase.”

The drop in inflation suggests that recent monetary policy has been doing its job, which makes the prospect of a “soft landing” ever more likely, according to Richard Flynn at Charles Schwab UK. The news reinforces the probability that officials will “hold off” from further rate hikes, he noted.

“With the U.S. economy holding up, the inflation data are ‘soft-landing nirvana’ for the equity markets,” said Neil Dutta, head of economics at Renaissance Macro Research.

An intact disinflationary process means that the Fed can “sit tight for now” — which would lower the risk of an “overly restrictive policy,” said Lauren Goodwin at New York Life Investments.

Still, “we’d caution investors before getting too enthusiastic,” Goodwin noted. “Financial conditions are now easing again, which keeps the Fed on guard and highly data dependent.”

Equities have rallied in November on bets the Fed is done with rate hikes, with the S&P 500 up more than 7% in the span — and heading toward its best month since October 2022.

In the past 22 years, when the S&P 500 was up 5% or more by mid-November, the remainder of that year was positive every single time, according to data compiled by Bloomberg. Go back 50 years, and that setup was positive 26 out of 30 times, with the decline in the four exceptions being 1% or less.

“We need to see more months with soft inflation data, but the stock and bond market is celebrating today,” said Gina Bolvin, president of Bolvin Wealth Management Group. “We’re set up nicely for a year-end rally.”

Meantime, investors turned the most bullish on bonds since the global financial crisis amid “big conviction” that rates will move lower in 2024, according to the latest Bank of America Corp. fund manager survey. The poll showed investors were dumping cash to hold the biggest overweight position in bonds since 2009. 

Bond giant Pacific Investment Management Co. — among the many whose expectations for a rally this year were disappointed — is renewing the call for 2024.

Bonds “have rarely been as attractive as they appear today” relative to stocks, Pimco managers Erin Browne, Geraldine Sundstrom and Emmanuel Sharef say in a new report predicting “prime time” for the asset class in 2024.

Traders are also keeping an eye on another slew of Fed speakers to get their thoughts on the latest data and how that would impact the central bank’s next steps. Thomas Barkin, president of the Richmond Federal Reserve Bank, said he’s not convinced inflation is on a clear path toward the central bank’s 2% target despite “real progress” curbing price pressures in recent months.

Elsewhere, oil rose on bets that a halt to interest-rate increases would improve the outlook for demand, with a weaker dollar making commodities priced in the currency more attractive to buyers. Gold and copper also gained.