Stocks Soar as Investors Welcome Signs of Cooling Inflation

Markets rose on Tuesday after the inflation report for November showed price gains slowed more than economists expected, offering investors clarity on the path of inflation and a sign that the Federal Reserve could slow down its interest rate increases.

The S&P 500 rose 1.6 percent by midday, extending the previous day’s gains. Still, the benchmark index is down about 15 percent for the year.

The report on consumer prices, the last major data release before the Federal Reserve meets on Wednesday to set interest rates, provided a clear sign that inflation is cooling, prompting markets to move higher. For months, Wall Street has been looking for data that could encourage the Fed to moderate its interest rate increases, which the central bank has used to try to temper stubbornly high inflation. Higher interest rates have increased costs for companies and dampened consumer demand.

“That was about as good as investors could have hoped for,” said Rob Temple, global market strategist at Lazard. “The pieces are falling into place for the Fed to pause rate hikes early in 2023.”

Overall inflation was up 7.1 percent from a year ago, compared with economists’ expectations of 7.3 percent and down from 7.7 percent in October. The report is a welcome sign for investors after a mixed bag of economic data in recent weeks have delivered signals that suggest inflation may remain stubbornly high, weighing on markets.

The Consumer Price Index report showed inflation cooling in October, but a gauge of wholesale prices showed inflation rising more than expected last month. The job market also remains resilient, putting pressure on prices: Employers added 263,000 jobs in November — more than economists expected.

The Fed is expected to raise rates half a percentage point on Wednesday, which would represent a slowdown from increases of three-quarters of a point in previous meetings. At the same time, a rise in the markets make the Fed’s job harder because it enriches investors and stimulates the economy, the opposite of what central bankers are trying to do to bring down inflation.

The yield on the U.S. two-year Treasury note, which closely tracks expectations for Fed rate moves, fell on Tuesday, as investors dialed back expectations for how high the Fed will ultimately raise rates. As the Fed has continued its campaign to increase rates to bring down inflation, the yield on the two-year bond has risen well above the 10-year equivalent, a rare but reliable sign of a recession.

The inflation report and the Fed meeting on Wednesday “will undoubtedly set the tone for financial markets as we head into next year,” economists at Deutsche Bank wrote in a research note on Friday.

“This was universally good from an inflation standpoint. It’s moving in the right direction,” said Peter Tchir, head of macro strategy at Academy Securities.

Joe Rennison contributed reporting.