Nasdaq rebounds more than 20% from recent lows after US inflation falls

U.S. stocks rallied on Wednesday, with the tech-heavy Nasdaq Composite Index closing more than a fifth above lows reached earlier this year, after new data showed inflation stabilizing in the largest economy in the world.

Consumer prices in the United States rose 8.5% year-on-year in July, a slower increase than in June and lower than economists’ forecast of 8.7%. Data released on Wednesday also showed that on a monthly basis, there was no increase in inflation in July compared to the monthly rise of 1.3% in June.

The figures further fueled a two-month rally in financial markets as traders bet that the Federal Reserve might have to temper its aggressive interest rate hikes aimed at reining in soaring prices.

The Nasdaq Composite, which includes big tech companies such as Apple and Microsoft, rose 2.9% on Wednesday, taking its gains to 20.7% from lows reached in June. Fast-growing companies in the index have been hit hard this year as investors cut their expectations for global growth and Treasury yields have surged.

The blue-chip S&P 500 stock index rose 2.1%, closing above 4,200 for the first time since early May. The benchmark is up 14.8% from its nadir in 2022, though U.S. stocks as a whole are still worth about $8.6 billion less than they were at the start of the year.

Line chart of combined market valuations of publicly traded companies in the US (in billions of dollars) showing the rally has added more than $5 billion to the value of US stocks since the June low

Volatility measures, which have been elevated since Russia’s invasion of Ukraine and increased odds of a US recession began to rattle investors, also declined. The Vix index of expected stock market volatility fell below its long-running average of 20 for the first time since April.

“Inflation has been expected to peak over the summer for some time, so it was reassuring to markets that there were clear signs that this appeared to be happening,” said Oliver Blackbourn, portfolio manager at Janus Henderson Investors.

Prices for two-year US Treasuries, which are particularly sensitive to changes in Fed interest rate policy, also rallied following the inflation report.

The advance pushed the yield on the note down 0.05 percentage points to 3.22%. The yield on the benchmark 10-year Treasury note, which moves with inflation and growth expectations, rose 0.01 percentage point to 2.79%.

The U.S. dollar, a haven for investors in times of uncertainty, also retreated in reaction to the data, losing 1.1% against a basket of six currencies.

The benchmark inflation index in the United States had reached 9.1% in June, the highest level in 40 years, prompting the Fed to make consecutive increases in interest rates of 0 .75 percentage points over the summer.

Yet inflation data shows prices remain well above the US central bank’s 2% target.

“While the spike in inflation is good news, it’s probably not enough to allow the Fed to ease its tightening or dispel recession fears,” said Mike Bell, global markets strategist at JPMorgan. Asset Management.

Core inflation, a measure of price growth that excludes volatile categories such as energy and food, also came in below expectations, remaining at the 5.9% level reached in June and well into below the peak of 6.5% reached in March.

“I think it could be a new bull market as opposed to a bear market rally. The Fed will eventually pivot, the pace of increases will have to slow,” said Patrick Spencer, vice president of equities at Baird.

However, others have warned that inflation remains high. “It’s good to see a fresher report coming in, but we’ll leave the champagne bottles capped for now,” said Brian Nick, chief investment officer at Nuveen.

In Europe, the Stoxx 600 index closed up 0.9% and the German Dax index gained 1.2% after losses in the previous session.

Declines in tech stocks dragged down indices in Asia, which closed ahead of the release of CPI data. Hong Kong’s Hang Seng closed down 2%, China’s benchmark CSI 300 of stocks listed in Shanghai and Shenzhen fell 1.1% and Japan’s Topix closed down 0.2%.

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