Stocks pared earlier gains but still finished higher Tuesday, following a softer-than-expected reading for November inflation that has triggered more bets on a near-term pivot on interest rate policy from the Federal Reserve.
Headline inflation slowed for a fifth consecutive month in November, data from the Commerce Department indicated, falling to an annualized rate of 7.1% amid a slump in gas and used car prices, airfares and healthcare costs. So-called core inflation, which strips out the impact of food and energy prices, was also lower, falling to an annual rate of 6.0%.
Bond markets reacted swiftly to the reading, with benchmark 10-year Treasury note yields falling 5 basis points to 3.499% while 2-year notes dropped 10 basis points to 4.21%. The U.S. dollar index, which tracks the greenback against a basket of its global peers, fell 1.06% to 104.02.
"While Tuesday's report showed a deceleration in inflation, which is great news, inflation is still very elevated and is over three times greater than the Fed's 2% target, so this isn't time for the Fed to take a victory lap," said Nancy Davis, founder of Quadratic Capital Management and portfolio manager of the Quadratic Interest Rate Volatility and Inflation Hedge Exchange-Traded Fund (IVOL).
"The number won't likely change anything for the Federal Reserve ahead of its meeting this week, as its decision was likely made weeks ago," she added. "Powell wants to show the market that the days of the big, 75 basis point hikes are over and the pace is slowing, so it's likely that the Fed announces a smaller 50 basis point rate hike on Wednesday."
The CME Group's FedWatch is now pricing in an 86.6% chance of a 50 basis point Fed rate hike tomorrow in Washington, up from 72.5% prior to the data release, with just a 13.4% chance for a fifth consecutive 75 basis point hike.
The S&P 500 rose 0.73%, while the Dow Jones Industrial Average finished up 103 points, or 0.30%, to 34,108. The tech-focused Nasdaq gained 1.01% thanks in part to the pullback in Treasury bonds yields.
In overseas markets, Europe's Stoxx 600 closed near a a one-month high, rising 1.3% to 442.60 points, following the U.S. inflation data, even as the euro jumped 1.11% to 1.0652 against the slumping greenback.
Overnight in Asia, further indications of an easing in China's Covid policies, as well as the scrapping of PCR test requirements for foreign visitors to Hong Kong, helped the region-wide MSCI ex-Japan index to a 0.6% gain.
