Thursday morning on Wall Street, elation reigns in the wake of a government report indicating that U.S. inflation slowed considerably more than economists anticipated last month. As of 10:31 a.m. Eastern time, the S&P 500 rose 156 points, or 4%, to 3,905. The Dow climbed 872 points, or 3%, to 33,385 while the tech-heavy Nasdaq jumped 5.6%. The yields on U.S. Treasuries decreased sharply as bond markets loosened.
Even bitcoin gained, recouping a portion of its severe decline from the previous days triggered by the new crisis of confidence in the cryptocurrency business. A decline in inflation could reduce the Federal Reserve’s need to aggressively raise interest rates. Such increases have been the primary cause of Wall Street’s difficulties this year and risk a recession.
Yield on the 10-year Treasury, which helps determine mortgage and other lending rates, fell substantially to 3.93% late Wednesday from 4.10%.
Inflation fell to 7.7% this month, down from 8.2% in September, according to the consumer price index (CPI) data. It is the fourth consecutive month of deceleration since inflation peaked at 9.1% in June, and it was even better than the 8% economists had predicted.
Core inflation decreases
After disregarding the effects of food and energy prices, inflation also slowed more than projected. This is the indicator that the Fed pays the most attention to. Inflation also increased between September and October.
According to Brian Jacobsen, senior investment strategist at Allspring Global Investments, the month-to-month inflation rate is far more instructive. According to this metric, inflation is still high, but not alarmingly so.
Slower inflation could prevent the Fed from pursuing the most aggressive interest rate hike strategy. It has already increased its main lending rate to a range between 3.75 to 4 percent, up from near zero in March.
The Federal Reserve hikes interest rates by an additional 0.75 percent. 04:29
Hiking will continue
Although the news was positive, analysts cautioned against concluding that the war against inflation has been won.
“The Fed remains on track to raise the fed funds rate by 0.50% on December 14,” LPL Financial’s senior economist Jeffrey Roach wrote in an email. However, investors should respond positively to these optimistic movements in consumer prices in the near future.
The head of model portfolio creation at Morgan Stanley Global Investment Office, Mike Loewengart, also cautions investors not to get carried away by the supposedly game-changing news.
“The Fed was categorical that it wouldn’t halt rate hikes unless inflation slowed, and while the market’s rebound implies investors may see light at the end of the tunnel, it will get one more reading before making a decision next month,” he said. Remember that even as we observe a slowdown, prices remain elevated and have a considerable distance to fall before stabilizing.
04:26 The stock market reacts to midterm elections
Another potentially market-shaking news will strike Wall Street on Friday, when the latest estimate of anticipated inflationary pressures among U.S. households is released. Chairman of the Federal Reserve Jerome Powell has stated that he is paying close heed to such expectations.
One of the reasons the Fed has been so active in raising interest rates is that it wants to avoid a vicious cycle in which people’s expectations of high inflation induce them to alter their behavior in ways that contribute to even higher inflation.
Several factors have pushed the market both up and down this week, causing stocks to fluctuate significantly. On the one hand, investors are hopeful that Tuesday’s elections will result in a divided government in Washington between Democrats and Republicans. Votes are still being tabulated, so the outcome for this is uncertain. However, this could prevent the kind of massive economic reforms that make investors concerned.
FTX implosion
Huge losses in the cryptocurrency market were threatening to spread to other markets and at the very least shake investor confidence. Prior to the inflation data, Bitcoin was trading below $16,500, down from around $20,000 a week earlier and nearly $69,000 a year ago. Within a half-hour, it rose $1,000 before settling down around $17,400.
The crypto market declines when Binance pulls out of the FTX agreement at 5:05.
Much of this week’s crypto commotion has centered on one of the largest trading exchanges, FTX, where the latest crisis of confidence in the industry has prompted clients to race to withdraw their funds. Due to the amount of money that many crypto investors have borrowed to conduct transactions, sharp decreases in cryptocurrency values can precipitate even sharper price declines.
According to the strategists at JPMorgan, the process of lenders requiring investors to provide additional collateral, known as a margin call, may take weeks. According to the analysts, a challenge for the market is the diminishing number of large, financially powerful firms who can rescue the weaker ones.