October’s cooler-than-expected consumer inflation report triggered a massive surge in stocks that could herald the traditional midterm election year rally-fourth quarter. Bond yields fell hard, as stocks galloped higher after October’s consumer price index rose 0.4%, less than 0.6% expected. The gain was 7.7% from a year ago, less than the 7.9% expected by economists surveyed by Dow Jones. Core inflation, excluding food and energy, also surprised, rising 0.3% month over month compared to the estimate for a gain of 0.5%. Strategists have been expecting a fourth-quarter rally, since in the midterm election year, that has historically been the case. Now that Tuesday’s election is over, and inflation seems to be heading in the right direction, strategists say the time is right for a risk rally. To be sure, they also warn that there is a risk that the rally could be changed by hot inflation reports or other factors, such as the crypto crisis. Thursday’s CPI report breaks the string of surprising inflation. While the Dow Jones Industrial Average jumped more than 800 points, the 10-year Treasury yield fell to 3.82%. Produces a reverse price move. The Nasdaq, which was most affected by higher rates, rallied 5.6%. In the futures market, traders bet on the lower endpoint for the Federal Reserve’s rate hikes. Fed funds futures are priced at the terminal rate for fed funds of 4.88% by May, down from 5.05% before the inflation report, according to BMO. “Midterms are over. We finally broke the inflationary trend here,” said Jim Paulsen, chief investment strategist at Leuthold Group. “We put some doubt on what the Fed can or can not do. And who knows, Russia just experienced another big loss yesterday.” Russia’s invasion of Ukraine has been a big catalyst for inflation this year as it has driven up the price of energy and other commodities. “We think there are some triggers for the rally building over the next few weeks,” said Julian Emanuel, head of equities, derivatives and quantitative strategy at Evercore ISI. Evercore ISI had called a peak in inflation earlier, but the CPI report more clearly pointed to a decline that was widely embraced in the market on Thursday. Emanuel said that, given the extreme focus on inflation this year and the “extremely positive bond-stock correlation and correlation of the dollar to stocks,” Thursday’s market move was clearly important. “The fact that the CPI has triggered such a volatile drop in yield and a volatile drop in the dollar really tells you that the psychology of the stock market has changed consistently with a very positive yearend, post midterm seasonality,” said Emanuel. Emanuel said the market now sees inflation moderating, adding that there is potential for the Fed to pause in 2023 although strategists expect the central bank to keep rates at higher levels. “Our year-end price target is 3,975 [for the S & P 500]. If you just look at the degree of the bear market rally from the low last June, and think about that we can get to 4,150, “he said. S & P 500 was just above 3,900 in morning trading. The strategist also pointed to the risks, including the meltdown in the crypto market and the collapse crypto exchange FTX and big losses by crypto investors.Bitcoin also rallied after the CPI report, gaining more than 6% to the level of $17,554 on Coin Metrics in mid-morning trading. “While the jury is still out, it does not seem as if the economy will be enough resilient so crypto will not contagion as much as it was 24 hours ago,” said Emanuel. What will the Fed do. ? The CPI report may have facilitated the view that the Fed will continue to raise rates well above 5% for now. But the report is only an input for the Fed, which is expected to continue raising interest rates next spring. “Now the question is what we hear from the Fed. That will determine how far the rally can extend. A single data point is not enough to make the statement completely but it adds to it [for peak inflation],” said Ben Jeffery, Rate Strategist at BMO. Economists are expecting some easing in inflation, and it may continue to moderate as the shelter and other costs decrease in the coming months. “This confirms the Fed’s own view that they should have more measured rate hikes. now but this does not stop them,” said KPMG chief economist Diane Swonk. “It only affirms their plan.” She expected the Fed to keep hiking and then keep rates steady at a high level to keep inflation in check. But he said inflation. “The price of goods those related to housing, such as appliances and furniture are down, and he expects the CPI to show a sharp drop in housing costs early next year. “From the perspective of the Fed, this is welcome news but not enough to stop them from raising rates and tightening,” he said. “What I’m more concerned about is how quickly you can cool these lags. We just don’t know what’s happening in crypto and where the land mines can trigger in terms of the tightening of the larger credit market. said soon the focus of the market can move back to the idea of the economy can be classified into a recession next year. “The problem is going very quickly that the anxiety is going to run if ‘inflation is slowing down, but then it will be growth?'” Paulsen said. Another discussion is, can we be gentle? It would be a strong discussion if people think the war against inflation is on but they also think it’s just a mid-year slowdown.