NEW YORK — U.S. stock markets surged on Wednesday in response to a positive update regarding U.S. inflation, buoyed further by strong earnings reports from major banks such as Wells Fargo. This resulted in the best trading day for indexes witnessed in the past two months.
The S&P 500 rose by 1.8%, while the Dow Jones Industrial Average shot up 703 points, equivalent to a 1.7% increase. The Nasdaq composite experienced an even more significant rise, climbing 2.5%.
In the bond market, Treasury yields softened after statistics revealed that American households paid more in December for essential items such as eggs, gasoline, and housing. Overall inflation was noted to have increased to 2.9%, up from 2.7% in November. While rising inflation is not ideal, the underlying numbers presented a more promising picture. When food and energy prices, known for their volatility, are set aside, core inflation trends slowed to 3.2% in December, whereas economists anticipated it would remain steady at 3.3% for the fourth consecutive month, as per data from FactSet.
The Federal Reserve tends to focus more on this core figure rather than the general inflation number, particularly since concerns have emerged regarding a stall in progress on inflation and challenges in approaching the Fed’s objective of 2%. While many traders do not expect this latest information to prompt an interest rate cut by the Fed during its upcoming meeting later this month, there is speculation among economists and analysts that it could pave the way for potential cuts later in the year, possibly as soon as March, if subsequent data reflects a decrease in inflationary pressures.
Seema Shah, Chief Global Strategist at Principal Asset Management, noted that investors might face considerable fluctuations in the market as they react to forthcoming data releases. This situation has led to a continuous cycle of highs and lows on Wall Street, with traders readjusting their projections for Fed rate actions in 2025. Loosening monetary policy could foster growth in the U.S. economy and uplift investment prices while potentially reigniting inflationary pressures.
Last year, there was considerable optimism surrounding the prospect of a series of interest rate cuts, evident in the surge of stock prices, but expectations have recently tempered. The Fed has also signaled a more cautious outlook, suggesting it might reduce rates only twice this year as opposed to the previously forecasted four cuts. Some in the market are even entertaining the prospect of future rate hikes.
Wednesday’s report effectively dispelled immediate fears of rate hikes, resulting in a decrease in Treasury yields. The yield on the 10-year Treasury fell to 4.65% from 4.79% at the end of the previous trading day, a notable decline compared to its rise since September when it hung below 3.65%. The two-year Treasury yield, which is more aligned with anticipated Fed movements, also decreased to 4.26% from 4.37%.
Bank stocks were prominently featured in the rally, with many institutions reporting better-than-expected profits for the final quarter of 2024. Wells Fargo’s share price surged by 6.7%, followed closely by Citigroup at 6.5%, and Goldman Sachs, which saw a 6% gain. Being among the first large U.S. firms to disclose their quarterly results, these banks attracted heightened attention from the market.
When bond yields rise and bond investments offer higher interest returns, it can pressure stock prices by redirecting investors towards bonds. In response, stock prices must either fall or corporate earnings must see stronger growth. Stocks of companies likely to benefit from lower interest rates were also among the leaders in the market.
For instance, Builders FirstSource, a key supplier in the construction sector, increased by 4.7%, anticipating that lower mortgage costs would enhance the housing market.
In summary, the S&P 500 climbed 107.00 points to finish at 5,949.91. The Dow Jones Industrial Average rose 703.27 points to reach 43,221.55, while the Nasdaq composite gained 466.84 points, closing at 19,511.23. The favorable U.S. inflation figures had a positive impact on global stock markets, easing tensions in the international bond markets as well.
In the UK, the FTSE 100 saw a 1.2% increase, rebounding after recent difficulties tied to increasing bond yields and economic concerns. Other European indexes also enjoyed gains of 0.7% in France and 1.5% in Germany, while trading in Asia remained relatively quiet as the markets had closed prior to the U.S. inflation report. South Korea’s Kospi experienced little movement even as enforcement officials detained the impeached President Yoon Suk Yeol concerning previous martial law declarations.
