NASDAQ Composite Surges More that 5.50% as New Data Raises Hope that US Inflation May Be Peaking

Wall Street’s major stock indexes led by the tech-heavy NASDAQ Composite opened sharply higher on Thursday as investors bought the futures indexes with both hands during the pre-market session after data showed consumer prices increased less than expected in October. The news is spurring hopes that the Federal Reserve pulls back the reins on the size of its future interest rate hikes.

At 14:30 GMT, the Dow Jones Industrial Average futures contract is at 33389.00, up 862.00 or +2.67%. The S&P 500 Index is at 3892.25, up 136.75 or +3.64% and the NASDAQ Composite is trading 11341.75, up 514.00 or +4.75%.

CPI Comes in Lower than Expected

The U.S. Labor Department said consumer prices advanced 7.7% in the 12 months through October, after rising 8.2% at the end of September, while the core rate, which excludes volatile food and energy prices, increased 6.3% on a year-on-year basis last month, from 6.6% in September.

Economists polled by Reuters had expected the CPI and core number to rise 8% and 6.5%, respectively.

Treasury Yields Tumble

Essentially, the stock market rally was fueled by a drop in yields. U.S. Treasury yields declined across the board on Thursday after the October consumer price index report, a key inflation measure, came in weaker than the forecast, signaling that price increases have possibly peaked.

The benchmark 10-year Treasury yield slumped 18 basis points to 3.946%, falling below the psychological 4% level. The yield on the 2-year Treasury note fell 23 basis points to 4.395%.

The latest CPI report gave investors hope that inflation is now past its peak, lending confidence that the Federal Reserve’s interest rate hikes are slowly working to tame high prices increases.

 Beat Up Tech Shares Recovering

Tech shares that have been the hardest hit this year as inflation and rates surged are leading the gains shortly after the opening. Nvidia and Tesla are soaring more than 5%. Salesforce is jumping 4%, Apple is up 3%.

Semiconductor stocks also got a boost, with shares of Lam Research, KLA and Applied Materials each up more than 5%.

Daily Forecast

U.S. stock index futures are expected to remain underpinned throughout the session and perhaps over the near-term as long as 10-year yields remains below 4.0%.

However, our long-term view is still sketchy because inflation still has a long way to go before it normalizes. It’s the Fed’s difficult job to find that normalization level. It is 5% or is it 2%, the Fed mandate. It going to take a long time to get down to these levels, dropping 0.3% a month.

“Inflation slowing to its lowest annual rate since January is news that both the Fed and investors can get behind,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office.

“The Fed was adamant that it won’t hit the brakes on rate hikes until inflation slows, and while the market’s rally indicates investors may see light at the end of the tunnel, it will get one more reading before its decision next month.”

In other words, don’t get too excited about this rally because rates are going to keep going up until at least June 2023. All the CPI report is saying is that the Fed may be able to afford to raise rates by 50 basis points instead of 75 basis points.

But we don’t know that for sure. It may 2 or maybe 3 straight reports of lower inflationary growth to persuade the Fed to take their foot off the gas.

In the meantime, rising rates will continue to eat into profits, keeping a lid on stock prices.