Markets Soar on Signs of Slower Inflation

Stocks jolted higher on Thursday, after fresh data showed a moderation in inflation, bolstering investors’ expectations that the Federal Reserve will soon slow the pace of interest rate increases that have weighed on the market.

The S&P 500 soared 4.4 percent in morning trading. If it holds through the day it will be the best one-day performance for the index since April 2020 and the early market recovery from the pandemic.

Other markets also experienced large moves, with the U.S. dollar falling 2 percent, a welcome sign for countries around the world whose currencies have weakened as the American currency rose to a two-decade high this year. U.S. government bond yields, which feed into borrowing rates around the world and are particularly sensitive to expectations for future interest rate increases, fell sharply.

“This is what we have all been waiting for because so much hinges on this,” said Kristina Hooper, chief global market strategist at Invesco. “I think there is a good chance inflation has peaked and is now moderating.”

Consumer Price Index data on Thursday showed prices rose slower in October than economists had forecast, providing a tailwind for financial markets that had been bruised earlier in the week by an unexpectedly close midterm election and turmoil in cryptocurrency markets, following the near-collapse of one of the largest crypto exchanges.

The earlier downturn had primed markets to rise, investors said, and as crypto markets recovered some ground on Thursday, and the election drew closer to a final result, the release of the better-than-expected C.P.I. data meant stock markets went “crazy,” said Andrew Brenner, head of international fixed income at National Alliance Securities. “It was a big drop” in C.P.I., he said.

Seema Shah, chief global strategist at Principal Asset Management, said that the numbers would be met with “ovation” in stock markets, noting that the year-over-year pace of inflation is now lower than it was before the conflict in Ukraine sent energy prices soaring. “The long-awaited decline in inflation could now be underway.”

The palpable sense of relief in markets is reflective of the pain wrought by inflation this year, as rising prices have increased costs for companies and dragged earnings lower.

For investors the medicine has felt as bad as the illness, as the Fed has sought to reduce stubbornly high inflation by slowing the economy through higher interest rates, which raise borrowing costs and have sent stock markets tumbling. Even after today’s move, the S&P has fallen 18 percent this year.

As inflation begins to slow, investors hope it could spell the beginning of the end of the Fed’s punishing rate increases, though some analysts and investors cautioned that it would take a more prolonged period of slowing inflation before the central bank stopped raising interest rates. “This is the first step,” Ms. Hooper said.

The Fed chair, Jerome H. Powell, took a hard line at the central bank’s meeting last week, saying that the job of lowering inflation was far from over.

And a chorus of Federal Reserve officials on Thursday made it clear that central bankers would stick with their plans to raise interest rates to an economy-restricting level and hold them there for some time, even if they slow the pace of those moves in coming months.

While the cooler inflation number was welcome, it was just one data point and price increases remain much too fast. A slowdown in the pace of rate moves could come imminently, but pausing rate increases is “not even a discussion item,” Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said during a webcast event, adding that the data remain “far from a victory.”

Nonetheless, having pushed expectations of future interest rate increases higher following Mr. Powell’s comments last week, investors reassessed the outlook after seeing the new inflation numbers.

Investors have priced out any chance of a fifth consecutive three-quarter-point increase in December, instead anticipating a smaller 0.5 percentage point increase to the Fed’s policy rate.

Market expectations for where interest rates will move to next year dropped from a peak of more than 5 percent to around 4.85 percent on Thursday, as investors dialed back expectations of the number of interest rate increases to come. The yield on the two-year Treasury bond, which is sensitive to changes in Fed policy, plummeted by more than 0.2 percent to around 4.3 percent, its biggest one-day decrease since 2008 — and Treasuries have been characterized by big moves this year.

The slide in interest rate expectations helped stock markets. The Nasdaq Composite index, which is stuffed with tech stocks that are more sensitive to changes in interest rates, rose over 6 percent on Thursday.

Some investors now expect stocks to maintain the rally through the typically quiet Thanksgiving holiday and into December, when the next major update on the health of the labor market will be released. Others are more cautious.

“As much as I like an up market this is still a bear market rally,” John Lynch, chief investment officer for Comerica Wealth Management, said on Thursday. “We haven’t reached the bottom.”

Jeanna Smialek contributed reporting.