Wall Street surged to its best day since April 2020 as markets cheered a government report that inflation cooled more than expected last month.
The S&P 500 jumped 5.5% Thursday, and the Dow rose nearly 1,200 points as traders took the data as a sign the worst of inflation may have passed.
Treasury yields fell dramatically as bond markets relaxed. The yield on the 10-year Treasury, which helps set rates for mortgages and other loans, fell to 3.85% from 4.10% late Wednesday, which is a major move for the bond market. The two-year yield, which more closely tracks expectations for Fed action, dropped to 4.32% from 4.58%.
Even bitcoin rose on hopes a slowdown in inflation could mean the Federal Reserve won't have to be so aggressive about raising interest rates. Such hikes have been the main reason for Wall Street's troubles this year and are threatening a recession.
All the action stemmed from a U.S. government report showing that inflation slowed in October for a fourth straight month since hitting a peak of 9.1% in June. The reading of 7.7% was better than the 8% economists were expecting.
Perhaps more importantly, inflation also slowed more than expected after ignoring the effects of food and energy prices. That's the measure the Fed pays closer attention to. So did inflation between September and October.
"The month-on-month rate of inflation is much more informative," said Brian Jacobsen, senior investment strategist at Allspring Global Investments. "On that measure, inflation is still high, but not scary high."
Slower inflation could keep the Fed off the most aggressive path in raising interest rates. It's already raised its key rate to a range of 3.75% to 4%, up from virtually zero in March.
By raising rates, the Fed is intentionally trying to slow the economy and jobs market in hopes of undercutting inflation, which hit a four-decade high in the summer. The risk is that it can create a recession if it goes too far, and higher rates drag on prices for stocks and other investments in the meantime.
Higher interest rates have particularly hit high-growth tech stocks, cryptocurrencies and other investments seen as the riskiest or most expensive.
Big Tech stocks were some of the most buoyant forces on Wall Street following the inflation report. Apple and Microsoft both rose 6.8%, while Amazon soared 11.7%.
Tesla also rose nearly 6%, though it remains down by roughly half since CEO Elon Musk announced in April that he was Twitter's largest shareholder. Investors fled the electric vehicle maker on fears Musk would be distracted by Twitter, and he has sold more than $19 billion in Tesla stock since then.
Slower inflation could get the Federal Reserve to downshift the size of its rate hikes at its next policy meeting in December, after it pushed through four straight increases of 0.75 percentage points. That could open the way for the Fed to return to the more typical increases of 0.25 percentage points before pausing hikes completely.
While Thursday's report on inflation was encouraging, analysts cautioned the Fed's campaign against high inflation is likely still far from over. Inflation data has given false hope before, only to reaccelerate again.
"The Fed was adamant that it won't hit the brakes on rate hikes until inflation slows, and while the market's rally indicates investors may see light at the end of the tunnel, it will get one more reading before its decision next month," said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office. "Remember that even as we see a slowdown, prices remain elevated and have a long way to go before normalizing."
Another potentially market-shaking report will hit Wall Street Friday, when the latest reading arrives on how much inflation U.S. households see coming in future years. Fed Chair Jerome Powell has said he's paying particularly close attention to such expectations.
