[New York Stock Market] Rises on Easing Inflation... Nasdaq Up 1.01%

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] Major indices of the U.S. New York stock market closed higher on the 13th (local time) as the November Consumer Price Index (CPI) increase, released ahead of the Federal Reserve's (Fed) interest rate decision, slowed more than expected.

On this day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average rose 103.60 points (0.30%) from the previous session to close at 34,108.64. The S&P 500, centered on large-cap stocks, increased by 29.09 points (0.73%) to 4,019.65, and the tech-heavy Nasdaq rose 113.08 points (1.01%) to close at 11,256.81.

By sector, all 10 sectors of the S&P 500, including interest rate-sensitive technology, real estate, and materials, showed gains. Amazon rose 2.14% and Google Alphabet increased 2.49% compared to the previous session. However, Tesla, a representative tech stock, fell more than 4% amid heightened management risks related to CEO Elon Musk's Twitter acquisition. Among individual stocks, Moderna jumped 19.63% after revealing progress related to cancer treatment. Pfizer rose 1.74% following Goldman Sachs upgrading its investment rating from neutral to buy. United Airlines dropped nearly 7% after deciding to purchase at least 100 Boeing 787 Dreamliners to replace inefficient aircraft.

Investors focused on the CPI data released that day and the Fed's December Federal Open Market Committee (FOMC) regular meeting scheduled for the next day. The November CPI rose 7.1% year-over-year, below the expert forecast of 7.3%, marking the smallest increase since December last year. The CPI increase, which surpassed 9% in June this year, has been slowing since. The November CPI also rose 0.1% month-over-month, below the market expectation of 0.3%. Core CPI, excluding volatile energy and food, increased 6.0% year-over-year and 0.2% month-over-month, also below market expectations. Omar Sharif, founder of Inflation Insights, described the report as "showing a fairly broad-based slowdown."

This CPI was released amid the two-day final FOMC regular meeting of the year. Regardless of the CPI, the market expects the Fed to take a ‘big step’ by raising the benchmark interest rate by 0.5 percentage points on the 14th, signaling a moderation in tightening pace. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds (FF) futures market currently reflects over a 79% chance of a 0.5 percentage point hike. This would set the U.S. benchmark interest rate at 4.25?4.50%.

With the inflation decline curve becoming clearer and the data falling below market expectations, there is an assessment that the Fed has more justification to moderate its pace. This broadens the Fed’s maneuvering room in monetary policy operations. Following the December big step, there is also speculation that the next meeting in February next year could see a baby step (0.25 percentage point increase). The probability of a February baby step following the December big step has risen from the mid-30% range to the mid-50% range after the CPI release. Conversely, the chance of a February big step has dropped by more than 10 percentage points.

Paul Ashworth, Chief North America Economist at Capital Economics, said, "While the October CPI below expectations could be dismissed as a one-off data point, the additional slowdown in November CPI makes it difficult to ignore this trend." Peter Cardillo, Chief Economist at Spartan Capital Securities, analyzed, "Inflation is on a downward trend," adding, "The Fed will act less aggressively. After the 0.5 percentage point hike in December, it is more likely to raise rates by 0.25 percentage points starting February next year."

In the New York bond market that day, Treasury yields all closed lower. The 10-year U.S. Treasury yield fell to as low as 3.421% during the session before recovering to the 3.5% level, still down more than 11 basis points from the previous session. The 2-year yield also dropped to 4.139% intraday before narrowing losses to the 4.2% level. The inversion of the yield curve, where long-term 10-year yields fall below short-term 2-year and 3-month yields, continues. This is generally interpreted as a precursor to a recession. However, the 2-year to 10-year yield inversion, which had fueled recession fears, has narrowed compared to last week's 80 basis points.

The dollar showed weakness. The Dollar Index, which measures the value of the dollar against six major currencies, traded around the 104 level, down more than 1% from the previous session.

Currently, investors are awaiting the Fed’s release of the dot plot and economic outlook along with the interest rate decision the next day. Although inflation has passed its worst phase, it remains at a high level, leading to widespread analysis that a Fed pivot (direction change) will not be as easy as expected. Fed Chair Powell is also expected to draw a line under pivot expectations during the press conference on the 14th, stating, "The fight against inflation is not over yet."

Steve Sosnick, Chief Strategist at Interactive Brokers, said, "Today's data is quite a surprise, and the market is reacting accordingly," adding, "The bullish scenario is playing out." The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), known as Wall Street’s ‘fear gauge,’ fell nearly 10% from the previous session to the 22 level.

International oil prices rose due to the weaker-than-expected CPI and the dollar’s weakness. On the New York Mercantile Exchange, January WTI (West Texas Intermediate) crude oil prices closed at $75.39 per barrel, up $2.22 (3.03%) from the previous session.