Inflation is cooling, and Wall Street loves it


New York
CNN affairs

Stocks were mostly higher on Tuesday after the US government reported that wholesale prices rose much less dramatically than expected. That news came just a few days after another report showed that the pace of consumer price increases also slowed.

The Dow was flat during afternoon trading, having given up much of its gains from earlier in the day. But the S&P 500 and Nasdaq were up 0.7% and 1.3% respectively.

Stocks retreated after reports that two rockets had hit a village in Poland near the border with Ukraine. Two people would have died.

Still, investors hope that easing inflationary pressures will prompt the Federal Reserve to raise interest rates by smaller amounts in the coming months, following four consecutive historically large rate hikes.

Solid earnings from retail giant Walmart (WMT), one of the 30 components in the Dow, also helped boost market sentiment. Shares of Walmart (WMT) rose 7%.

Tech stocks were boosted by the surprise news that Warren Buffett’s Berkshire Hathaway (BRKB) bought a stake in chip giant Taiwan Semiconductor in the third quarter.

Shares of Taiwan Semi (TSM) soared more than 12%. The benchmark Philadelphia Semiconductor Index (SOX), which includes Taiwan Semi (TSM), Intel (INTC), AMD (AMD), Nvidia (NVDA) and other chip leaders, rose 4%.

But it’s the good news on the inflation front that gives investors the biggest reason to cheer. Traders are now betting that it’s almost a bull’s-eye that the Federal Reserve will raise rates by only half a percentage point at its next meeting on December 14, instead of three-quarters of a point.

Traders are counting an 85% chance of only a so-called 50 basis point increase at that meeting, compared to less than a 30% chance a month ago, according to the federal funds futures on the CME.

In addition to the more favorable inflation data, investors also seem to be taking solace in comments from Fed Vice Chairman Lael Brainard on Monday.

Brainard said at a Bloomberg News event “it makes sense to move at a more deliberate and data-driven pace” when it comes to future rate hikes. Those comments reassured investors, who were shocked by comments from another Fed official about inflation and interest rates.

Fed Governor Christopher Waller told attendees of a UBS event in Australia that “we have a long, long way to go to bring inflation down,” adding that “rates will continue to rise and remain high .” for a while.”

Still, some experts worry that the market is getting too excited about the latest inflation numbers. The Fed is clearly still more concerned about inflation than the possibility that its aggressive rate hikes will slow the economy.

“It is less clear whether [the inflation reports] will be enough for the Fed to rethink how far they will go in raising rates,” said Andrzej Skiba, head of US Fixed Income at RBC Global Asset Management. “The Fed will need more data. It really is all about inflation and everyone will be glued to their screens for new data.”

Others agree that the Fed is unlikely to suddenly decide that it can declare victory in the war on inflation any time soon. That means the market has to get used to the idea that interest rates will continue to rise and may remain high for some time to come.

“Reducing inflation will be much more of a focus than it has been in the last 15 years,” said Ashish Shah, chief investment officer of public investments for Goldman Sachs, during a webcast Monday.

Shah said investors should not expect a “Goldilocks” scenario in which the Fed bails markets out with interest rate cuts and large bond purchases (a policy known as quantitative easing) to lower interest rates.

David Page, head of macro research at AXA IM, agreed with that assessment. He said growing expectations that the Fed could start cutting rates as soon as next year’s end is overly “optimistic.”

Page said he believes the Fed can raise rates, currently in a range of 3.75% to 4%, two more times to 4.75% to 5% in 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.

The Valley Voice
The Valley Voice
Christopher Brito is a social media producer and trending writer for The Valley Voice, with a focus on sports and stories related to race and culture.


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