S&P 500 futures extend rally amid signs of cooling inflation

What’s driving markets

Early futures trading Wednesday shows the S&P 500 adding to the previous session’s 1.9% surge, which marked its best daily percentage gain since April.

The rally, which pushed the Wall Street stock barometer back above its 100-day moving average, took its gains for the month to 7.2% and 17.1% for the year, came after a consumer price index report showed inflation in October surprisingly flatlined. The annual pace of CPI inflation also was cooler than expected at 3.2%.

The signs of easing price pressures has raised hopes that not only is the Federal Reserve now finished raising interest rates for this cycle, but it is now more likely to trim them next year. Markets are pricing in a 47% chance of a 25 basis point rate cut to a range of 5.00 to 5.25% in May, up from 32% a month ago.

Borrowing costs have tumbled, with the 10-year Treasury yield
BX:TMUBMUSD10Y
now down nearly 60 basis points from the 16-year high just above 5% touched last month.

Especially rate-sensitive parts of the equity market have been revived, with the Russell 2000
RUT
index of smaller companies jumping 5.4% on Tuesday, its biggest gain in just over a year.

“[M]ore bets are being placed on cuts to interest rates coming in the Spring. The upbeat sentiment looks set to continue to provide a tailwind to trading later on Wall Street,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown.

However, some observers cautioned that the market’s latest ebullience was a bit much. “I think people are overreacting to short-term numbers,” JPMorgan CEO Jamie Dimon told Bloomberg TV on Tuesday. “I’m afraid inflation might not go away that quickly,” and while the Fed was right to halt rate hikes for now “they might have to do a little bit more,” Dimon said.

A fresh test for the bond and stock market rally may come at 8:30 a.m. Wednesday when the October producer prices report is released. Traders will be hoping that pipeline inflation is also easing, while wishing that retail sales numbers, published at the same time, show the consumer has not been severely cowed by the Fed’s campaign of rate rises.

Other U.S. economic updates set for release on Wednesday include the November Empire State manufacturing survey at 8:30 a.m. and the September business inventories report at 10 a.m.

Fed Vice Chair for Supervision Michael Barr testifies to the House Financial Services Committee at 9:30 a.m., and Richmond Fed President Tom Barkin will speak at 3:30 p.m.

Meanwhile, broader market sentiment was underpinned Wednesday by news out of China. Data showed consumer and industrial activity in the world’s second biggest economy expanded faster than expected last month, while reports Beijing was planning a 1 trillion yuan ($137 billion) support package for the property sector also encouraged investors.

Companies delivering results on Wednesday include Target
TGT,
+4.32%
and TJX
TJX,
+1.49%
before the NYSE opening bell, followed by Palo Alto Networks
PANW,
+2.16%
and Cisco Systems
CSCO,
+1.80%
after the close.