Inflation is starting to cool, and Wall Street is loving it


New York
CNN Business

Stocks ended the day higher on Tuesday after the US government reported this total price It rose at a much less dramatic rate than expected. This news comes a few days after another report showed that the pace High consumer prices It was also slowing down.

The daw It rose nearly 60 points, or 0.2%, after giving up much of its gains earlier in the day. The Standard & Poor’s 500 And the Nasdaq It rose 0.9% and 1.5%.

Stocks fell slightly after that reports One or two missiles hit a village in Poland near the border with Ukraine. Two people were reportedly killed.

However, investors have largely looked beyond the geopolitical headlines and hope that calming inflation pressures will prompt the Federal Reserve to raise interest rates by smaller amounts in the next few months, after Four consecutive major highs in history.

Strong earnings From retail giant Walmart

(WMT)
, one of the 30 components of the Dow Jones index, also helped boost market sentiment. Walmart

(WMT)
The stock is up more than 6.5%.

Technology stocks got a boost from the surprising news that Warren Buffett’s Berkshire Hathaway

(BRKB)
bought a stake in Taiwan semiconductor giant chips during the third quarter.

Semi-Taiwan share

(TSM)
increased by more than 10%. Philadelphia Semiconductor Index

(SOX)
which has sub-Taiwan

(TSM)
Intel Corporation

(INTC)
AMD

(AMD)
nvidia

(NVDA)
And other leading chip manufacturers increased by 3%.

But it’s the good news on the inflation front that gives investors the biggest reason to cheer. Traders are now betting that it is almost acceptable for the Federal Reserve to raise interest rates by just half a percentage point, instead of three-quarters of a point, at its next meeting on December 14th.

Traders are pricing in more than an 80% chance of a 50 basis point increase just at that meeting, compared to a less than 30% chance a month ago, according to Federal funds futures contracts on the Chicago Mercantile Exchange.

In addition to the more moderate inflation numbers, investors also seem to be taking solace Comments made by Federal Reserve Vice Chairman Lyle Brainard on Monday.

“It makes sense to move at a measured, data-driven pace” when it comes to future rate hikes, Brainard said at a Bloomberg News event. Those comments calmed investors, who were spooked by remarks from another Fed official about inflation and interest rates.

“We have a long, long way to go to bring down inflation,” Federal Reserve Governor Christopher Waller told attendees of the UBS event in Australia, and added that “rates will continue to rise, and they will remain elevated for a while.”

However, some experts worry that the market is getting too excited about the latest inflation numbers. Clearly, the Fed remains concerned more about inflation than the possibility that its aggressive rate hikes will slow the economy.

“It is not clear whether [the inflation reports] “It would be enough for the Fed to reconsider how far it goes in raising rates,” said Andrei Skiba, head of US fixed income at RBC Global Asset Management. The Fed will need more data. It’s really about inflation, and everyone will be sticking to their screens for new data.”

Others agree that the Fed is unlikely to suddenly decide that it will be able to declare victory in the war against inflation any time soon. This means that the market has to get used to the idea that interest rates will continue to rise and may remain high for some time.

“Reducing inflation is going to be a lot more of a focus than it has been in the last 15 years,” Ashish Shah, chief investment officer for public investments at Goldman Sachs, said during a webcast Monday.

Shah said that investors should not expect a “Goldilocks” type scenario where the Federal Reserve comes to the bailout of the markets with rate cuts and large bond purchases (a policy known as quantitative easing) in order to drive interest rates lower.

David Page, Head of Macro Research at AXA IM, agreed with that assessment. He said mounting expectations that the Fed may start cutting interest rates as soon as the end of next year were too “optimistic”.

Page said he thinks the Fed could raise interest rates, currently in a range of 3.75% to 4%, two more times to 4.75% to 5% by March before pausing. He added that the Fed may then be on hold until 2024 and is unlikely to start cutting interest rates unless the labor market weakens significantly.

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