Lower-than-expected core inflation data for December, coupled with robust earnings reports from prominent U.S. banks, propelled a significant rally in the U.S. stock market on Wednesday. All three major indexes – the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite – experienced their most substantial daily percentage gains in over two months.
The Labor Department reported a nine-month high in the Consumer Price Index (CPI) due to rising energy costs. However, a key measure of underlying inflationary pressures showed a decline. This positive news followed Tuesday’s data revealing a lower-than-anticipated increase in the Producer Price Index (PPI).
Stephen Massocca, Senior Vice President at Wedbush Securities in San Francisco, commented on the market’s reaction: “Concerns about rising interest rates, borrowing challenges, and deficits have kept investors on edge. While not exceptionally low, the CPI and PPI figures are certainly not alarming. They suggest that inflationary pressures are easing.”
The Dow Jones Industrial Average surged by 703.27 points (1.65%) to close at 43,221.55. The S&P 500 climbed 107.00 points (1.83%) to reach 5,949.91, while the Nasdaq Composite advanced 466.84 points (2.45%) to finish at 19,511.23.
This marked the largest daily percentage increase for all three major indexes since November 6th. The Russell 2000 index, focusing on small-cap stocks, also experienced a significant jump of 1.99%.
The recent rally follows a period of struggle for the stock market, with the S&P 500 declining in four of the previous five weeks. A resilient economy, persistent inflation, and statements from Federal Reserve policymakers fueled concerns about a less aggressive approach to interest rate cuts than initially expected.
Lingering concerns remain regarding potential tariffs from the incoming Trump administration, which could further exacerbate inflation. However, the latest CPI data has boosted expectations for more Fed rate cuts this year, increasing the likelihood of at least a 25 basis point reduction at the June Fed meeting.
Federal Reserve officials acknowledged the positive implications of the recent inflation data but emphasized the uncertainty surrounding the coming months as they await policy decisions from the new administration.
The Fed’s Beige Book indicated slight to moderate economic growth in late November and December, with a modest uptick in employment and prices. Concerns about the potential impact of Trump’s policies were also noted.
The benchmark Treasury note yield, which reached a 14-month high of 4.809% earlier this week, dropped 13.7 basis points to settle at 4.651%. This decline reflects a shift in market sentiment following the encouraging inflation data. The market’s positive response underscores the significance of inflation figures in shaping investor confidence and driving stock market performance.
