[New York Stock Market] Rally Across the Board on CPI Slowdown... Nasdaq Up 2.37%

The three major indices of the U.S. New York stock market all closed higher on the 14th (local time) as consumer price index (CPI) data fell short of expectations, causing bond yields to decline and boosting hopes for the end of monetary tightening.

At the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 34,827.70, up 489.83 points (1.43%) from the previous session. The large-cap S&P 500 index rose 84.15 points (1.91%) to 4,495.70, while the tech-heavy Nasdaq index gained 326.64 points (2.37%) to close at 14,094.38.

All 11 sectors of the S&P 500 advanced. Real estate-related stocks jumped over 5%, while utilities and consumer discretionary sectors rose more than 3%. Home Depot climbed more than 5% on better-than-expected earnings. Nvidia continued its rally with a gain of over 2%. Tesla also showed gains exceeding 6%. Boston Properties and SolarEdge Technologies each surged more than 10%.

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The market rallied as it digested the CPI report released that morning. According to the U.S. Department of Labor, the October CPI rose 3.2% year-over-year. This was a significant slowdown from the previous month's increase of 3.7% and below the Dow Jones consensus estimate of 3.3%. On a month-over-month basis, October CPI was flat, falling short of both September's 0.4% increase and the market expectation of 0.1%.

This immediately strengthened expectations that the Federal Reserve (Fed) would not raise rates further, fueling hopes for a "Goldilocks" scenario and the end of tightening. In the New York bond market, the 10-year Treasury yield dropped to around 4.44%, and the 2-year yield, which is sensitive to monetary policy, fell to about 4.82%. The Wall Street Journal (WSJ) reported that this decline in the 10-year yield was the largest since March 17, when Silicon Valley Bank (SVB) filed for bankruptcy. The dollar index, which measures the value of the U.S. dollar against six major currencies, fell about 1.5% to around 104.0.

Sonu Bagess, Global Market Strategist at Carson Group, told CNBC, "This CPI report has sparked serious discussions about potential rate cuts in the first half of next year." Bryce Doty of Sit Fixed Income Advisors said, "The Fed's next move is more likely to be a rate cut next summer rather than another hike."

According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market currently prices in a 99.8% probability that the Fed will hold rates steady at 5.25-5.5% at the next meeting. This expectation of a pause rose from the previous day's 85% and briefly hit 100% following the CPI release that morning. Additionally, expectations for rate cuts next year have increased. Before the CPI release, the dominant scenario was a pivot starting in June with three rate cuts, but bets have expanded for four cuts beginning as early as May.

However, voices inside and outside the Fed cautioned that "there is still a long way to go." Austan Goolsbee, President of the Federal Reserve Bank of Chicago and a known dove (favoring monetary easing), said about the CPI report, "Progress is continuing," but added, "there is still a long way to go." Goolsbee, who holds voting rights on this year's Federal Open Market Committee (FOMC), warned that "there are always some obstacles on the path to lower inflation," signaling that the remaining process to achieve the 2% inflation target will not be easy.

On the same day, Thomas Barkin, President of the Richmond Fed, attending an event in Westminster, South Carolina, said, "We cannot be confident that inflation is moving gently toward 2%." He pointed out that "while inflation numbers have decreased, some of this is due to a partial reversal of price surges during the COVID-19 period caused by increased demand and supply shortages." He added, "Housing inflation remains above historical levels," and "service inflation is similarly elevated."

These remarks are interpreted as warnings based on concerns that growing market expectations for a pivot could inadvertently fuel inflation. James Bullard, former President of the St. Louis Fed and a prominent hawk (favoring monetary tightening), warned of the continued risk of inflation rebounding, saying, "There is a very high chance that the disinflation trend will reverse and go down the wrong path." He emphasized, "The good disinflation we have seen over the past 12 months may not continue, which remains a risk for the FOMC. They need to do more."

The following day, producer price index (PPI), a wholesale price gauge, and retail sales data, which provide insight into U.S. consumer spending, are scheduled to be released. October retail sales are expected to decline by 0.1%. While retail sales had shown a 0.9% year-over-year increase for about three months through September, a sharp drop is anticipated this month. However, this slowdown in consumption could reinforce expectations for the end of Fed tightening, potentially benefiting the stock market. Following Home Depot, retailers such as Target and Walmart will also report earnings this week.

The financial markets are also watching the possibility of a U.S. federal government shutdown. The temporary budget bill, which Congress barely passed earlier, is set to expire on the 17th. If the budget bill does not pass Congress by then, a shutdown will be inevitable. House Speaker Mike Johnson, a Republican, plans to work with Democrats to pass the temporary budget bill despite opposition from hardliners within his party to prevent a shutdown.

Additionally, a face-to-face summit between U.S. President Joe Biden and Chinese President Xi Jinping is scheduled during the Asia-Pacific Economic Cooperation (APEC) meeting held in San Francisco until the 17th. John Kirby, White House National Security Council (NSC) Coordinator for Strategic Communications, said during an onboard briefing that Middle East issues will also be discussed at this summit.

Oil prices traded flat. On the New York Mercantile Exchange, December delivery West Texas Intermediate (WTI) crude closed unchanged at $78.26 per barrel.