Stocks ended the day higher on Tuesday after the US government announced that wholesale prices rose at a much less dramatic pace than expected. The news comes just days after another report showed the pace of consumer price increases was also slowing.
The Dow Jones gained nearly 60 points, or 0.2%, after giving up much of its gains earlier in the day. The S&P 500 and Nasdaq rose 0.9% and 1.5%.
Shares fell slightly following reports that two missiles or rockets hit a village in Poland near the border with Ukraine. Two people were reportedly killed.
Still, investors have largely looked beyond the geopolitical headlines and are hoping that cooling inflationary pressures will lead the Federal Reserve to raise interest rates by smaller amounts in the coming months, after four consecutive historically large hikes.
Strong earnings at retail giant Walmart (WMT), one of the 30 components of the Dow Jones, also helped boost market sentiment. Shares of Walmart (WMT) rose more than 6.5%.
Tech stocks were boosted by the surprise news that Warren Buffett’s Berkshire Hathaway (BRKB) bought a stake in chip giant Taiwan Semiconductor during the third quarter.
Shares of Taiwan Semi (TSM) soared more than 10%. The benchmark Philadelphia Semiconductor Index (SOX), which includes Taiwan Semi (TSM), Intel (INTC), AMD (AMD), Nvidia (NVDA) and other chip leaders, gained 3%.
But it’s the good news on the inflation front that makes investors happy the most. Traders are now betting it’s almost a slam dunk that the Federal Reserve will only hike rates by half a percentage point, instead of three-quarters, at its next meeting on Dec. 14.
Traders are pricing more than 80% chance of a so-called hike of just 50 basis points at this meeting, up from less than 30% chance a month ago, according to fed funds futures on the CME.
Along with the more benign inflation numbers, investors also seem to take comfort in comments made by Fed Vice Chairman Lael Brainard on Monday.
Brainard told a Bloomberg News event “it makes sense to go at a more deliberate, data-driven pace” when it comes to future rate hikes. Those comments appeased investors, who were spooked by another Fed official’s remarks on inflation and interest rates.
Fed Governor Christopher Waller told attendees at a UBS event in Australia that “we have a long, long way to go to bring inflation down”, and added that “rates will continue to rise, and they will stay high”. for a certain time.”
Still, some pundits fear the market is getting too excited about the latest inflation numbers. The Fed is clearly even more concerned about inflation than the possibility that its aggressive rate hikes will slow the economy.
“It’s less clear if [the inflation reports] will be enough for the Fed to reconsider how far it is going in raising rates,” said Andrzej Skiba, head of U.S. fixed income at RBC Global Asset Management. “The Fed will need more data. It’s really all about inflation, and everyone is going to be glued 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 on inflation anytime soon. This means that the market should get used to the idea that interest rates will continue to rise and could stay high for some time.
“Reducing inflation is going to be much more of a priority than it has been in the past 15 years,” Ashish Shah, director of public investments at Goldman Sachs, said in a webcast on Monday.
Shah said investors shouldn’t expect a “Goldilocks” type scenario where the Fed comes to the rescue of markets with rate cuts and big bond purchases (a policy known as quantitative easing) to lower interest rates.
David Page, head of macro research at AXA IM, agrees with this assessment. He said growing expectations that the Fed could start cutting rates as soon as late next year are too “optimistic.”
Page said he thinks the Fed could raise 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 could then be on hold until 2024 and is unlikely to start cutting rates unless the labor market weakens significantly.
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