S&P 500, Nasdaq post best day since April as subdued inflation reading sparks buying frenzy

U.S. stocks closed sharply higher Tuesday, after a subdued October inflation reading reinforced expectations the Federal Reserve is finished raising interest rates and investors continued to pencil in rate cuts in 2024.

What happened

The Dow Jones Industrial Average
DJIA
rose 489.83 points or 1.4%, to close at 34827.70 in its third consecutive day of gain.
The S&P 500
SPX
advanced 84.15 points or 1.9%, to end at 4495.70, recording its largest one-day percentage gain since April 27.
The Nasdaq Composite
COMP
went up 326.64 points or 2.4% to 14094.38. It is also the index’s largest one-day percentage gain since April 27.
The small-cap Russell 2000
RUT
surged 92.82 points, or 5.4%, to 1,798.32, turning the beaten down benchmark positive on the year.

The S&P 500 and Dow were at their highest close since Sept. 14, while the Nasdaq recorded its highest finish since Aug. 1.

What drove markets

The October consumer-price index was unchanged from the previous month as cheaper gasoline took the edge off inflation, pointing to incremental progress in the Federal Reserve’s effort to get prices under control. Economists polled by the The Wall Street Journal had forecast a 0.1% increase in the CPI.

The so-called core reading, which excludes volatile food and energy prices and is more closely watched by policy makers and investors, rose 0.2%, bringing its year-over-year rate down to 4%. Economists had looked for a 0.3% monthly rise and a 4.1% year-over-year figure, with some warning of the potential for an upside surprise.

“The disinflationary trend is intact, raising investor spirits and encouraging hopes that a soft landing may still be in the cards, even if it’s not a given,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “An equity market that appeared to be looking for a catalyst for near-term direction has seemingly found it.”

“Core CPI came in below expectations with prices lower across the board. This is encouraging for markets and suggests a December hike is off the table,” said Damanick Dantes, portfolio strategist at Global X.

Traders are now seeing a higher likelihood of the Federal Reserve cutting interest rates up to five times in 2024, and expect the first cut could arrive as soon as March. They are pricing in a 27% likelihood that the Fed will cut its key interest rate in March, accoridng to CME Group’s FedWatch tool. That is up from 10.5% a day earlier.

The weaker-than-expected inflation also sparked a rally in Treasurys, pulling long-dated yields down sharply. The yield on the 10-year note
BX:TMUBMUSD10Y
was down 19 basis points near 4.45%.

Following on the heels of a summer surge in Treasury yields and energy prices that sent stocks into a correction, the CPI reading was “the latest item in a flood of good news hitting the market in November,” said David Russell, global head of market strategy at TradeStation.

“A soft landing and permanent Fed pause look increasingly likely, which would lay the groundwork for a strong year-end. Santa could be coming to town,” he said.