Wall Street upbeat as easing inflation lifts hopes of smaller rate hike

Wall Street stocks jumped, Treasury yields fell and the dollar weakened on Tuesday as new U.S. government data showed the smallest annual increase in inflation in nearly a year.

The consumer price index increased 0.1 percent last month after advancing 0.4 percent in October, the Labor Department said. Economists polled by Reuters had forecast the CPI gaining 0.3 percent.

The slowdown could give the Federal Reserve cover to start scaling back the size of its interest rate increases on Wednesday.

“This month’s report provides confirmation of October’s step down in inflation pressures and is welcome news for the Fed,” Morgan Stanley strategists wrote in a note on Tuesday morning.

“Tomorrow’s reduction in the pace of tightening to 50 (basis points) was already telegraphed, and with the downtrend in inflation becoming entrenched, the FOMC can set its sights squarely on the labor market.”

Global stocks jumped on the news. The Dow Jones Industrial Average rose about 1 percent, the S&P 500 gained 1.7 percent and the Nasdaq Composite added 2.4 percent.

The pan-European STOXX 600 index rose 2 percent and MSCI’s gauge of stocks across the globe gained 1.85 percent.

U.S. Treasury yields dropped sharply on the November inflation data.

The yield on 10-year Treasury notes was down 15.4 basis points to 3.458 percent; 30-year yields fell 9.2 basis points to 3.481 percent, and two-year yields, which typically move in step with interest rate expectations, dropped 21.4 basis points to 4.189 percent.

The dollar also reacted, plummeting against the yen and euro. Against a basket of major currencies, it was down more than 1 percent on the day. It was already down in the fourth quarter, largely because investors believe U.S. inflation has peaked.

The pound gained against dollar, up about 1 percent to $1.238, after data showed a rise in UK unemployment and an increase in wage growth that will keep Bank of England (BoE) policymakers on edge when they meet this week.

The Fed, European Central Bank and BOE are expected to raise rates by 50 basis points (bps), rather than the 75 bps hikes they delivered earlier in the year.

“If data such as today’s suggest a real trend that the momentum of inflation is lower, we could then see the Fed pause over the next few months at a still restrictive policy-rate, but not one which would put potentially excessively pressure on the economy,” Rick Rieder, BlackRock’s Chief Investment Officer of Global Fixed Income, said in a statement.

Commodities up

Oil rallied for a second day, having jumped 2.5 percnet on Monday, with U.S. crude up 1.94 percent to $74.59 per barrel and Brent at $79.85, up 2.38 percent on the day.

Gold, which is sensitive to shifts in U.S. inflation, also gained, with spot gold up 1.8 percent to $1,812.30 an ounce and U.S. gold futures up 2.2 percent to $1,819.70 an ounce.

In cryptocurrencies, bitcoin climbed around 3 percenrt to $17,734, and crypto-related stocks gained, even as FTX founder Sam Bankman-Fried was arrested and charged by U.S. regulators.