Wall Street hits 3-month high as inflation cools

Shares hit three-month highs on Wall Street on Wednesday as investors welcomed a government report showing inflation had cooled more than expected last month.

The encouraging inflation update sparked speculation that the Federal Reserve might not have to stay as aggressive on raising interest rates as feared. The central bank has raised rates in a bid to slow the economy in hopes of stamping out inflation, but that risks triggering a recession if the Fed acts too aggressively.

The S&P 500 rose 87.77 points, or 2.1%, to 4,210.24. The gains ended a four-day losing streak and pushed the benchmark to its highest levels since early May. It is now nearly 15% above its mid-June low.

The Nasdaq composite, whose many high-growth and expensive-looking stocks have been particularly vulnerable to interest rates, jumped 360.88 points, or 2.9%, to 12,854.80. That’s up more than 20% from June.

The Dow Jones Industrial Average rose 535.10 points, or 1.6%, to 33,309.51.

Tech stocks, cryptocurrencies and other hard-hit investments of the year were among the day’s biggest gainers. Bitcoin rose 2.2% to just under $24,000.

Lower gasoline and oil prices were responsible for much of the inflationary surprise last month. But even after ignoring that and food price volatility, so-called “underlying inflation” held steady last month instead of accelerating as economists had expected.

Traders work on the floor of the New York Stock Exchange in New York, Wednesday, Aug. 10, 2022. (AP Photo/Seth Wenig)

The data encouraged traders to reduce bets on how much the Fed will raise interest rates at its next meeting. They now see a half-percentage-point hike as the most likely outcome, according to CME Group. A day earlier, they were betting on a more aggressive 0.75 percentage point hike, the same as the last two increases.

Such differences may seem small, but interest rates help determine where prices go in financial markets. And higher rates tend to lower the prices of everything from stocks to commodities to crypto.

Bond prices shot up immediately after the inflation report was released, dragging bond yields down. The two-year Treasury yield, which tends to follow Fed expectations, fell to 3.19% from 3.27% on Tuesday evening.

The 10-year yield initially fell, but stabilized later in trade. It rose slightly to 2.79% from 2.78% on Tuesday evening. It remains below the two-year yield and many investors see such a gap as a fairly reliable signal of an upcoming recession.

Recession worries have been mounting as the highest inflation in 40 years weighs on households and businesses around the world. Wall Street is watching closely whether the Fed can successfully rein in the economy and cool inflation without sliding into a recession.

“It’s a very sharp path they’re trying to take here,” said Brian Nick, chief investment strategist at Nuveen.

Wednesday’s data rejuvenated Wall Street, which faltered following a stronger-than-expected jobs report on Friday that raised expectations for a more aggressive Fed. That bolstered hopes that a spike in inflation — and therefore the Federal Reserve’s most aggressive rate hikes — could be on the horizon.

“It’s a step in the right direction, but bear in mind that we have many miles ahead of us before inflation normalizes,” said Mike Loewengart, managing director, investment strategy, at E -Morgan Stanley trade.

Christy J. Olson