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U.S. stocks and bonds rose after data on Wednesday showed potential price pressures easing more than expected in the world’s largest economy, prompting investors to bet on faster rate cuts this year.
Data from the U.S. Bureau of Labor Statistics showed that the overall annual inflation rate rose to 2.9% in December from 2.7% in November, in line with expectations.
But excluding volatile food and energy costs, core inflation unexpectedly fell to 3.2% from 3.3% a month ago.
U.S. stock futures and Treasury bonds rose after the data. Markets have fallen in recent weeks as investors lowered expectations for a rate cut from the Federal Reserve in anticipation that President-elect Donald Trump’s economic policies will lead to inflation.
Seema Shah, chief global strategist at Principal Asset Management, said, “Today’s consumer price index should boost markets and ease concerns that the United States is at the beginning of a second wave of inflation.”
Contracts tracking the S&P 500 rose 1.5%, while contracts tracking the tech-heavy Nasdaq 100 gained 1.8%.
The dollar fell 0.5% against six other currencies.
In the government bond market, the policy-sensitive two-year bond yield fell 0.08 percentage point to 4.29%, while the 10-year bond yield, a benchmark for global borrowing costs, fell 0.09 percentage point to 4.7%. As prices rise, output falls.
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Federal Reserve officials have said they plan to take a “cautious approach” to cutting interest rates amid concerns that inflation may not fall soon to the central bank’s 2% target.
Investors are now betting the Fed will cut interest rates in July – compared with September before the data was released.
Currently, future markets are signaling a 60% chance of a second rate cut this year, up from 20% earlier Wednesday.
Mark Cabana, head of U.S. rates strategy at Bank of America, said inflation data, especially core data, could “modestly enhance” the Fed’s “confidence that inflation will continue to decline.” But he added that policymakers may “generally remain frustrated by the slowing pace of progress” on inflation.
Most investors and analysts believe the Fed will cut interest rates again at its next policy meeting later this month. U.S. central bank officials said in their forecasts that they would only cut interest rates by an additional 50 basis points this year.
Trump, who took office on Monday, laid out a radical plan to impose tariffs on a wide range of imported goods, launch a massive crackdown on undocumented immigrants and implement sweeping tax cuts.
Economists warn that such plans could further push up inflation.
