Inflation is cooling, and Wall Street loves it


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Business CNN

Stocks were mostly higher on Tuesday after the US government reported that wholesale price rose at a rate far less dramatic than expected. The news came just a few days after another report showed that the pace of rising consumer prices this is also slowing down.

The Dow it was flat in midday trading, after giving up many of its gains from earlier in the day. But it is S&P 500 and Nasdaq up 0.7% and 1.3%.

Stocks pulled back to follow REPORTS that two missiles or rockets hit a village in Poland near the border with Ukraine. Two people were reported killed.

Still, investors are hoping that cooling inflationary pressure will lead the Federal Reserve to raise interest rates by a small amount in the next few months, lower. four consecutive big hikes.

solid income from retail giant Walmart

(WMT)
, one of the 30 components of the Dow, also helped boost market sentiment. Walmart

(WMT)
shares rose 7%.

Tech stocks got a lift from the surprise news that Warren Buffett’s Berkshire Hathaway

(BRKB)
buy a stake in chip giant Taiwan Semiconductor during the third quarter.

Changes in the stock price of Taiwan Semi

(TSM)
skyrocketed more than 12%. Benchmark Philadelphia Semiconductor Index

(SOX)
the owner of Taiwan Semi

(TSM)
intelligence

(INTC)
AMD

(AMD)
Nvidia

(NVDA)
and other chip leaders there, it is up to 4%.

But it’s good news in the inflation front that gives investors the biggest reason for jubilation. Traders are now betting that it is almost a slam dunk that the Federal Reserve will raise rates by only half a percentage point, instead of three-quarters of a point, at its next meeting on December 14.

Traders priced in an 85% chance of just an increase of 50 basis points at the meeting, compared with less than a 30% chance a month ago, according to federal funds futures on CME.

In addition to more benign inflation numbers, investors also seem to take solace from comments made by fed vice chair Lael Brainard on Monday.

Brainard said in a Bloomberg News event “it makes sense to move through a more deliberate and data-dependent pace” when it comes to future rate hikes. The comments calmed investors, who had been surprised by remarks from other Fed officials on inflation and interest rates.

Fed Governor Christopher Waller told attendees at a UBS event in Australia that “we have a long, long way to go to reduce inflation,” adding that “rates are going to go up, and they’re going to stay high. for a while.”

Still, some experts worry that the market has gotten too excited about the latest inflation figures. The Fed is clearly still more concerned about inflation than the possibility of aggressive rate hikes that will slow down the economy.

“It is not clear if [the inflation reports] will be enough for the Fed to reconsider how far in hiking rates,” said Andrzej Skiba, head of US fixed income at RBC Global Asset Management. “The Fed needs more data. It’s all about inflation, and everyone will be glued to their screens for new data.

Others agree that the Fed is unlikely to suddenly decide that it will be able to declare victory in the war against inflation anytime soon. That means the market has to get used to the notion that interest rates will continue to rise and may continue to rise for some time.

“Raising inflation will be more focused than it has been in the past fifteen years,” said Ashish Shah, chief investment officer of general investments for Goldman Sachs, during a Monday webcast.

Shah said investors should not expect a “Goldilocks” type of scenario where the Fed comes to the rescue of the market with rate cuts and large bond purchases (a policy known as quantitative easing) in order to push interest rates down.

David Page, head of macro research at AXA IM, agreed with that assessment. He said the growing expectation that the Fed could start lowering rates as soon as the end of next year is overly “optimistic.”

Page said he believed the Fed could raise rates, currently in the 3.75% to 4% range, twice more to 4.75% to 5% by March before pausing. He added that the Fed could continue to hold off until 2024 and likely won’t start cutting rates unless the labor market weakens significantly.

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