US stocks advance as inflation data spark hopes of smaller Fed rate rises

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US stocks rose and Treasury yields dipped on Tuesday, as new signs that inflation cooled last month boosted hopes that the Federal Reserve would slow the pace of its interest rate increases.

Wall Street’s benchmark S&P 500 ended the day 0.9 per cent higher, having trimmed earlier gains, while the tech-heavy Nasdaq Composite rose 1.4 per cent. The S&P 500 has gained nearly 14 per cent from its intraday low in the second week of October.

Tuesday’s gains followed a report that showed US producer prices rose 0.2 per cent in October from September, compared with expectations in a Bloomberg poll of 0.4 per cent. The annual rate of wholesale inflation came in at 8 per cent, down from 8.4 per cent in September.

“This data is further confirmation of the peak for now in inflation, evidence that we’ve been seeing for months,” said Peter Boockvar, chief investment officer at Bleakley Financial Group.

The slowdown in the rise in factory gate prices comes after a report last week showed US consumer inflation was also easing, increasing hopes among some investors that the Fed would slow its tightening of monetary policy, which has lifted the dollar and weighed on stocks.

US government bond markets rallied — the yield on the two-year Treasury note slipped 0.06 percentage points to 4.35 per cent. The yield on the benchmark 10-year US note dropped 0.9 percentage points to 3.78 per cent. Yields fall when prices rise.

Some analysts believe investors have become unjustifiably optimistic on the recent gains in Wall Street stocks, however.

“S&P 500 daily returns of more than 2 per cent tend to be more frequent during bear markets,” said analysts at Goldman Sachs, who believe the recent rally in bonds and risky assets was “likely overdone”.

“The larger than expected inflation reset might support a slowdown in the hiking pace, but risks of a hike cycle extension remain,” the bank added.

Lael Brainard, vice-chair of the Fed, said on Monday that a slower pace of rate rises did not mean the central bank was damping its efforts to tackle historically high inflation.

“We’ve done a lot, but we have additional work to do both on raising rates and sustaining restraint to bring inflation down to 2 per cent over time,” she said, adding that while October’s better than expected inflation data was “reassuring”, it was only “preliminary”.

The debate over whether the latest upswing for equities constitutes the start of a genuine bull run or just a bear market rally is largely redundant in the absence of fresh economic news, said Mike Zigmont, head of trading and research at Harvest Volatility Management.

“Let’s just accept that investors are confused, but they are also not scared,” Zigmont added. “They just got a huge dose of relief [from the latest CPI data] and now they’re acclimatising to the new environment.”

Bank of America’s latest Global Fund Manager Survey, meanwhile, revealed 92 per cent of those polled predicted a bout of stagflation — low growth and high inflation — in 2023.

Asian markets also made strong gains after Xi Jinping and Joe Biden signalled a desire to improve US-China ties at a meeting on Monday ahead of the G20 summit in Indonesia, and Beijing moved to ease some pandemic curbs.

Hong Kong’s Hang Seng index added 4.1 per cent and has climbed by a quarter since its late-October low. China’s CSI 300 gained 1.9 per cent, while Japan’s Topix rose 0.4 per cent and South Korea’s Kospi added 0.2 per cent.

The regional Stoxx Europe 600 added 0.4 per cent, while London’s FTSE fell 0.2 per cent.

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