Stocks Eye Fresh Peak as CPI Boosts Rate-Cut Bets: Markets Wrap

(Bloomberg) — Stocks headed toward all-time highs on bets the Federal Reserve will slash rates again next month after in-line inflation data.

Equities pushed higher in afternoon New York trading, with the S&P 500 on pace for its 52nd record this year. Shorter-dated Treasuries outperformed, with the yield on two-year notes dropping from the highest since July. Swap traders boosted to about 80% the probability that the Fed will cuts rates again on Dec. 18. The dollar held at a two-year high. Bitcoin topped $92,000.

Listen and follow The Big Take daily podcast on Apple Podcasts, Spotify or wherever you listen.

A consumer price index that matched estimates brought a certain degree of relief to traders fearing that a hotter print that could hinder US policy easing. Minneapolis Fed President Neel Kashkari said that based on the headline numbers, he’s confident inflation “is headed in the right direction.” He spoke on Bloomberg TV just minutes after the release, emphasizing he hadn’t yet been able to look at the data in detail.

“Overall, it was a remarkably consensus print that leaves a December cut as the most likely outcome,” said Ian Lyngen at BMO Capital Markets.

The S&P 500 rose 0.4%. The Nasdaq 100 added 0.2%. The Dow Jones Industrial Average gained 0.5%.

Treasury 10-year yields were little changed at 4.44%. The Bloomberg Dollar Spot Index climbed 0.3%.

“A hotter-than-expected inflation number could have convinced the Fed to stand pat at its next meeting,” said Seema Shah at Principal Asset Management. “A December cut is still in the cards.”

Despite the market relief with Wednesday’s CPI report, the latest figures also underscore the slow and frustrating nature of the battle against inflation, which has often moved sideways — sometimes for months at a time — on its broader path down.

“The in-line CPI print shows that while substantial progress has been made in the fight against elevated inflation, the ‘last mile’ is proving more challenging,” said Josh Jamner at ClearBridge Investments. “Underlying inflationary pressures remain on a pace that is modestly above the Fed’s 2% target. With inflation holding steady, the market narrative should not see a significant shift as a result of today’s data.”

It’s a “business-as-usual print” for the Fed, according to Bank of America Corp.’s Stephen Juneau, Meghan Swiber and Alex Cohen.

“Inflation is moving sideways on a y/y basis, but there is nothing in today’s report that would alarm the Fed,” they said. “Therefore, a 25 basis-point cut in December firmly remains our base case.”

At Citigroup Inc., economists maintained their view that the Fed will cut rates by 50 basis points in December after the CPI data.

“While details remain volatile and not quite ‘normal,’ easing wage pressures, falling short-term inflation expectations, and high rates continuing to weigh on housing demand and prices should leave Fed officials comfortable that the path of inflation is slowing,” wrote Citi’s Veronica Clark and Andrew Hollenhorst.

To Preston Caldwell at Morningstar, while an an outside possibility of a “skip” still exists, he continues to believe the central bank will most likely cut rates next month.

After slashing rates last week, Fed Chair Jerome Powell worked hard not to offer forward guidance on where rates could go from here, keeping his options open for the December meeting and beyond. He stressed that officials can take their time to lower rates because the economy is strong. He also said that policy is still restrictive, even after the November cut, and that policymakers are in the process of bringing rates to neutral levels.

“Last week, Chair Powell reinforced that the Fed believes its policy stance is still restrictive, and that they remain on a rate-cutting trajectory,” said Lauren Goodwin at New York Life Investments. “We agree with current market expectations around Fed pricing.”

With inflation still stubbornly above the Fed’s 2% goal, the Fed may have only one rate cut left in December before taking a pause, according to Skyler Weinand at Regan Capital.

“The incredible move in the stock market post-election has effectively eased financial conditions,” he said. “This easing, combined with incoming fiscal stimulus, may warrant a pause on rate cuts by the Fed in the near future to allow the dust to settle and to process more incoming data.”

The Fed cutting short-term rates along with future fiscal stimulus may both ignite inflation again and provide cause for longer term interest rates to rise, he said, adding that he sees 10-year Treasury bond yields climbing to 5% in 2025.

In fact, a recent survey conducted by 22V Research before the CPI release shows the share of investors expecting a recession has fallen while the percentage of those that believe financial conditions need to tighten has increased to the highest since June 2024.

Ellen Zentner at Morgan Stanley Wealth Management remarks that markets are already weighing the possibility that the Fed will cut fewer times in 2025 than previously thought, and that they may hit the pause button as early as January.

“The sticky components of inflation continue to ease, giving the Fed some leeway to cut rates next month but they will most likely pause in January,” said Jeffrey Roach at LPL Financial. “The strength of some cohorts of the consumer is keeping upward pressure on prices as consumer spending hasn’t slowed yet. Stronger-than-expected economic growth is likely keeping bond yields elevated.”

While investors shrugged off the latest news on US inflation, they seem increasingly concerned about its longer-term outlook, according to Diana Iovanel at Capital Economics.

“We share their view and expect Treasury yields to rise a bit further still,” she said.

At Goldman Sachs Asset Management, Lindsay Rosner says that after a run of unseasonably hot data, the latest CPI cools fears of an imminent slowdown in the pace of rate cuts. 

“Still, with uncertainty over fiscal and trade policies high there is a risk that the Fed may opt to slow the pace of easing as the New Year chill sets in,” she noted.

“After the massive rally we’ve seen in stocks, investors are looking for any sort of excuse that can usher in a pullback,” said Bret Kenwell at eToro. “A batch of in-line inflation data isn’t likely to do the trick.

Markets resolved higher following the election, instilling a “buy the dip” mentality on Wall Street, Kenwell said. If the market were to sell off in the short term, the pullbacks are likely to be shallow as fund managers buy the dip and look to chase performance into year-end, Kenwell concluded.

“It’s time to stop worrying about the Fed and inflation,” said David Russell at TradeStation. “Stocks have been on autopilot since the election and today’s numbers do nothing to hurt the trend. December is still in play for a cut.”

Some of the main moves in markets:

This story was produced with the assistance of Bloomberg Automation.

More stories like this are available on bloomberg.com