Cooling CPI Drives Risk-On Rally: S&P 500 Surges, Tesla Leads; Gold Gains, Yields Fall

Gold Eyes Breakout as Inflation Cools in December CPI Report

Gold prices are primed for a significant breakout following the December Consumer Price Index (CPI) report, which pointed to easing inflation. Core inflation rose 3.2% year-over-year, slightly below the expected 3.3%, while the headline CPI increased by 0.4% on the month and 2.9% annually. These figures fueled a decline in both Treasury yields and the U.S. dollar, key drivers of gold’s recent strength. With inflation showing signs of moderation, gold’s appeal as a hedge is reigniting, positioning it for a bullish breakout above key resistance levels.

Treasury Yields Drop, Boosting Gold’s Upside Potential

The softer CPI data triggered a sharp pullback in Treasury yields. The 10-year yield fell 7 basis points to 4.721%, while the 2-year yield dropped to 4.3%. Lower yields reduce the opportunity cost of holding non-yielding assets such as gold, creating a favorable environment for its continued rally.

The U.S. dollar index also declined by 0.2%, further enhancing gold’s attractiveness for international investors. Historically, gold prices have an inverse correlation with yields and the dollar, and this latest market reaction supports a strong bullish outlook for the metal.

Stock Markets Rally as Inflation Moderates

The CPI report had an equally bullish impact on equity markets, with Dow futures surging over 600 points and the S&P 500 and Nasdaq futures climbing 1.6% and 1.8%, respectively. Growth stocks, which are particularly sensitive to borrowing costs, saw significant pre-market gains as Treasury yields tumbled.

Tesla and Nvidia advanced 3.2% and 1.7%, respectively, reflecting renewed confidence in sectors that thrive on lower interest rates. The positive sentiment across equities underscores the market’s belief that the Federal Reserve may adopt a more dovish stance moving forward.

Is the Fed on Track for Rate Cuts in 2025?

The December CPI report, coupled with Tuesday’s Producer Price Index showing softer wholesale inflation, has strengthened the case for Federal Reserve rate cuts in 2025. While the Fed is unlikely to adjust rates in its January meeting, the moderation in core inflation aligns with the central bank’s goals. Skyler Weinand, Chief Investment Officer at Regan Capital, noted that the data provides a “measure of relief” for markets, particularly following last week’s robust labor market report. This has bolstered hopes for a pivot away from the tightening cycle.

Market Forecast: Gold Breakout, Lower Yields, and Equity Gains

Gold is poised to test higher levels as falling yields and a softer dollar provide significant tailwinds. Equity markets are likely to maintain their upward momentum, particularly in growth-oriented sectors, as expectations of a less hawkish Fed persist. Treasury yields could face further downward pressure if inflation continues to cool and the Fed signals a willingness to ease monetary policy in the coming year. Traders should closely monitor upcoming retail sales and housing data for confirmation of these trends.

More Information in our Economic Calendar.