S&P 500, NASDAQ Composite Trim Gains after Advancing on Cooler CPI Data

The benchmark S&P 500 Index and the tech-weighted NASDAQ Composite Index are trading higher at the mid-session on Tuesday in a volatile trading session. The rally is being fueled by government data that supported the notion that consumer inflation is peaking.

The markets were trading higher before the release of a report on consumer inflation at 13:30 GMT. Prices soared after the weaker-than-expected figures were released, but have since then given back nearly half of its earlier gains.

The price action suggests that traders may have overreacted to the inflation data, or may be taking profits ahead of the Federal Reserve’s interest rate decision on Wednesday.

At 16:44 GMT, the Dow Jones Industrial Average is trading 34255.10, up 250.06 or +0.74%. The S&P 500 Index is at 4048.14, up 57.58 or +1.44% and the NASDAQ Composite Index is at 11369.83, up 226.10 or +2.03%.

 Light Consumer Inflation Data Fuels Investor Optimism

The consumer price index rose just 0.1% from the previous month, and increased 7.1% from a year ago, the Labor Department reported Tuesday. Economists surveyed by Dow Jones had been expecting a 0.3% monthly increase and a 7.3%% 12-month increase.

Excluding volatile food and energy prices, so-called core CPI rose 0.2% on the month and 6% on an annual basis, compared to respective estimates of 0.3% and 6.1%.

Today’s surprise CPI reading drove Treasury yields lower, and stock market investors responded accordingly. Investors were essentially placing a bet that the Fed will go easy on interest rates when it makes its announcements on Wednesday.

Fed Policy is Still an Open Question

Tuesday’s CPI report could play a major role in the Federal Reserve’s next rate-hiking decision expected at the conclusion of its two-day policy meeting on Wednesday.

Today’s report shouldn’t change trader expectations of a 50-basis point increase in the benchmark rate. However, the lighter CPI number could encourage the Fed to bring an end to its rate hikes sooner than previously expected and perhaps at a lower-than-expected terminal rate.

Banking Sector Could See Slower Revenue Growth if Interest Rates Peak

KBW cut its recommendation on the U.S. banking sector to “market weight” from “overweight” on expectations that the industry’s main driver for revenue growth will slow next year.

Net interest income growth will likely peak in this year’s fourth quarter at 30% and decline to just 5% by the fourth quarter of 2023, KBW analysts said Tuesday in a research note.

Banks are generating more interest income this year after the Federal Reserve began its most aggressive rate-hiking cycle in decades. That was one of the reasons KBW upgraded its recommendation on banks in Sept. 2021 to “overweight.”