Prices for bonds soared immediately after the inflation report’s release, pulling their yields lower. The yield on the two-year Treasury, which tends to track expectations for the Fed, fell to 3.19 per cent from 3.27 per cent late Tuesday.
The 10-year yield initially fell, though stabilized later in trading. It edged higher to 2.79 per cent from 2.78 per cent late on Tuesday. It remains below the two-year yield and many investors see such a gap as a fairly reliable signal of a coming recession.
Recession worries have built as the highest inflation in 40 years squeezes households and corporations around the world. Wall Street is closely watching to see if the Fed can succeed in hitting the brakes on the economy and cooling inflation without veering into a recession.
“It’s a very knife-edge type of path that they are trying to tread here,” said Brian Nick, chief investment strategist at Nuveen.
To be sure, inflation is still painfully high, and the expectation is for it to stay so for a while. But Wednesday’s data nevertheless rejuvenated Wall Street, which staggered following a stronger-than-expected jobs report on Friday that raised expectations for a more aggressive Fed. It bolstered hopes that a peak in inflation — and thus in the Federal Reserve’s most aggressive rate hikes — may be on the horizon.
“This is a step in the right direction but keep in mind we have many thousands ahead of us before inflation normalises,” said Mike Loewengart, managing director, investments strategy, at E-Trade from Morgan Stanley.
The Federal Reserve will get a few more highly anticipated reports before its next announcement on interest rates September 21, which could also alter its stance. Those include reports showing hiring trends across the economy due September 2 and the next update on consumer inflation coming on September 13.
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More immediately, reports this week will show how inflation is doing at the wholesale level and whether US households are still ratcheting down their expectations for coming inflation, an influential data point for Fed officials.
Wednesday’s inflation data nevertheless helped stocks across Europe climb to modest gains, while markets that closed earlier in Asia were mostly down. Germany’s DAX returned 1.2 per cent, Japan’s Nikkei 225 fell 0.6 per cent and Hong Kong’s Hang Seng lost 2 per cent.
On Wall Street, companies in the housing industry were strong on hopes that a less aggressive Fed could mean less pressure on mortgage rates. Homebuilder DR Horton gained 4.7 per cent, PulteGroup rose 4.6 per cent and Lennar was 3.6 per cent higher.
Cruise lines and other travel-related companies also made big gains. Carnival rose 9.2 per cent and American Airlines rose 3.1 per cent.
Netflix, a formerly high-flying and high-growth stock that has plunged to be this year’s worst in the S&P 500, was up 6.2 per cent though it remains down by nearly 60 per cent for 2022.
AP
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