US stocks rallied on Wednesday, with the tech-heavy Nasdaq Composite index closing more than a fifth above lows hit earlier this year, after new data showed inflation was consolidating into the world’s largest economy.
US consumer prices rose 8.5% year-on-year in July, a slower increase than in June and below economists’ forecasts of 8.7%. Data released on Wednesday also showed that, in month-on-month terms, there was no increase in inflation in July compared with June’s 1.3 percent monthly increase.
The numbers added more fuel to a two-month rally in financial markets as traders bet the Federal Reserve would be prompted to moderate its aggressive rate hikes in a bid to rein in rising prices .
The Nasdaq Composite, which includes tech giants such as Apple and Microsoft, rose 2.9% on Wednesday, extending its gains to 20.7% from June lows. Fast-growing companies in the index were hit hard this year as investors cut their global growth forecasts and Treasury yields rose.
The S&P 500 advanced 2.1%, closing above 4,200 for the first time since early May. The benchmark is up 14.8 percent from its nadir in 2022, although U.S. stocks as a whole are still worth about $8.6 trillion less than when the year began.
Measures of volatility, which have increased since Russia’s invasion of Ukraine and rising odds of a U.S. recession began to rattle investors, also eased. The Vix index of expected stock market volatility fell below its long-term average of 20 for the first time since April.
“Inflation has long been expected to peak over the summer, so it was reassuring for markets that there are clear signs that this appears to be happening,” said Oliver Blackbourn, portfolio manager at Janus Henderson Investors.
Two-year US Treasury bond prices, particularly sensitive to changes in the Fed’s interest rate policy, also rallied after the inflation report.
The advance pushed the note’s yield down 0.05 percentage points to 3.22%. The benchmark 10-year Treasury yield, which moves with inflation and growth expectations, rose 0.01 percentage point to 2.79 percent.
The U.S. dollar, a haven for investors in times of uncertainty, also retreated in reaction to the data, falling 1.1 percent against a basket of six currencies.
The US inflation benchmark had reached 9.1 percent in June, the highest level in 40 years, prompting the Fed to offer outsized interest rate hikes of 0.75 percentage points during summer
Still, inflation data shows prices remain well above the US central bank’s 2% target.
“While peak inflation is welcome news, it’s probably not enough to allow the Fed to ease its tightening or put recession fears to bed,” said Mike Bell, global market strategist at JPMorgan Asset Management.
Core inflation, a measure of price growth that strips out volatile categories such as energy and food, also came in below expectations, remaining at the 5.9% level it reached in June and well below the peak of 6.5% in March.
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“I think this could be a new bull market rather than a bear market rally. The Fed will pivot eventually, the pace of hikes will have to slow down,” said Patrick Spencer, vice president of equities at Baird.
However, others warned that inflation remains high. “It’s nice to see a fresher report coming in, but we’ll leave the champagne bottles uncorked for now,” said Brian Nick, chief investment officer at Nuveen.
In Europe, the Stoxx 600 index closed down 0.9% and Germany’s Dax index gained 1.2% after losses in the previous session.
Losses in technology stocks dragged down indexes in Asia, which closed ahead of the release of the CPI data. Hong Kong’s Hang Seng closed up 2 percent, China’s benchmark CSI 300 of shares traded in Shanghai and Shenzhen fell 1.1 percent and Japan’s Topix closed down 0.2 percent.