Stocks rally on subdued inflation data, Fed signals no rate hike

The U.S. stock market ended higher on Wednesday, extending its rally from the previous session, as investors welcomed another round of subdued inflation data and the Federal Reserve signaled no imminent rate hike. The Dow Jones Industrial Average rose 0.6% to close at 36,157, while the S&P 500 gained 0.8% to finish at 4,697, both reaching record highs. The Nasdaq Composite advanced 1.1% to end at 15,966, also hitting a new peak.

The main catalyst for the market’s optimism was the October producer price index (PPI), which measures the change in the prices of goods and services sold by producers. The PPI rose 0.6% last month, slightly below the consensus estimate of 0.7%, while the core PPI, which excludes food and energy, increased 0.4%, matching expectations. On a year-over-year basis, the PPI climbed 8.6%, the highest on record, while the core PPI rose 6.8%, also a record high.

Stocks rally on subdued inflation data, Fed signals no rate hike
Stocks rally on subdued inflation data, Fed signals no rate hike

However, investors focused on the monthly changes, which showed a moderation in inflationary pressures compared to September, when the PPI and the core PPI both jumped 0.8%. The PPI data followed the consumer price index (CPI) report on Tuesday, which also showed a slight deceleration in inflation in October. The CPI rose 0.9% last month, down from 1.4% in September, while the core CPI increased 0.6%, down from 0.8%.

The inflation data eased some of the concerns that the Fed would have to tighten its monetary policy sooner than expected to combat rising prices. The Fed has maintained that inflation is transitory and largely driven by supply chain disruptions and pandemic-related factors, and that it expects inflation to moderate as the economy recovers. The Fed has also indicated that it will start tapering its monthly bond purchases this month, but that it will not raise interest rates until the labor market reaches full employment and inflation is sustainably above 2%.

Fed minutes reaffirm dovish stance

The market’s sentiment was further boosted by the release of the minutes from the Fed’s latest policy meeting in early November, which reaffirmed the central bank’s dovish stance. The minutes showed that the Fed officials agreed to begin tapering their bond purchases at a pace of $15 billion per month, but that they did not see the need to accelerate the tapering process or to signal a faster rate hike path.

The minutes also revealed that the Fed officials discussed the risks and benefits of various policy tools, such as yield curve control and forward guidance, but that they did not reach any conclusions on how to use them in the future. The minutes suggested that the Fed is keeping its options open and is ready to adjust its policy stance as needed, depending on the incoming data and the evolving economic conditions.

The market interpreted the Fed minutes as a sign that the central bank is not in a hurry to raise interest rates, and that it will remain supportive of the economic recovery. The market also expects the Fed to provide more clarity on its rate hike outlook at its next meeting in December, when it will release its updated economic projections and the dot plot, which shows the individual rate expectations of the Fed officials.

Market movers and outlook

The market rally was broad-based, with all 11 sectors of the S&P 500 ending in positive territory. The technology sector led the gains, as the Nasdaq outperformed the other major indexes. The tech-heavy index was lifted by the strong performance of some of its biggest components, such as Apple, Microsoft, Amazon, and Nvidia. Nvidia soared 8.3% to become the first chipmaker to end a trading session with a market capitalization above $1 trillion, after it reported stellar quarterly results and raised its revenue guidance.

The energy sector also performed well, as oil prices rebounded from a sharp drop on Tuesday. The price of West Texas Intermediate crude, the U.S. benchmark, rose 2.5% to settle at $80.54 per barrel, while the price of Brent crude, the global benchmark, gained 2.4% to close at $82.62 per barrel. The oil prices were supported by the lower-than-expected increase in the U.S. crude inventories and the signs of strong demand from China, the world’s largest oil importer.

The market outlook remains positive, as the investors anticipate a strong holiday season and a robust earnings growth for the fourth quarter. The market is also hopeful that the new coronavirus variant, dubbed Omicron, will not pose a significant threat to the global health and economic recovery. However, the market may face some volatility and uncertainty in the coming weeks, as it awaits more data on inflation, consumer spending, and the labor market, as well as the developments on the fiscal policy front, such as the passage of the infrastructure bill and the social spending package.

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