US stock indexes rallied on Tuesday as cooler-than-expected inflation data boosted expectations that the Federal Reserve was done raising interest rates and could start cutting them next year.
The benchmark S&P 500 briefly crossed the 4,500 mark for the first time in two months and the tech-heavy Nasdaq was trading at a fresh two-month high after data showed that growth in US consumer prices eased in October, in part due to lower gasoline prices.
In the 12 months through October, the CPI climbed 3.2% after rising 3.7% in September, while economists polled by Reuters had forecast a 3.3% gain on a year-on-year basis.
Core prices, which exclude the volatile food and energy components, rose 4.0% compared with economists’ estimate of a 4.1% increase.
“We’re happy to see both headline and core CPI come in lower than expected. It’s telling us that the Fed is done, there’s nothing left for it to do here,” said Thomas Hayes, chairman at hedge fund Great Hill Capital at New York.
“This is what the Fed was looking for, slowing inflation, slowing labor market, and the economy’s holding up at the same time.”
Following the data, traders erased bets the Fed would raise borrowing costs any further and piled into bets on rate cuts starting by May. They are currently pricing in a 100% chance the Fed will hold rates next month, as per CME Group’s Fedwatch tool.
US Treasury yields dropped, with the two-year yield, which best reflects short-term interest rate expectations, sliding to two-week lows.
That, in turn, lifted megacap growth stocks such as Nvidia, Alphabet, Amazon and Tesla up between 1.6% and 4.7%.
The small-cap Russell 2000 index jumped 4.7% to hit an over six-week high. Rate-sensitive sectors such as real estate and utilities, which have been hammered this year, rose 5.5% and 3.4%, respectively.
Wall Street’s main indexes have seen a strong rebound in November on expectations that US interest rates were near their peak, even as Fed Chair Jerome Powell last week left the door open to further tightening.
Focus is also on negotiations by US lawmakers over a funding bill as they face an end-of-week deadline to fund the federal government.