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U.S. stocks rose on Tuesday after a unexpectedly small consumer price increase buoyed optimism that the Federal Reserve could soon dial back its inflation-taming interest rate hikes, but concerns remained the central back could stay aggressive.
The benchmark S&P 500 (.SPX) jumped as much as 2.76% to a three-month high early in the trading session on news that November U.S. consumer prices barely rose as gasoline and used cars cost less, leading to the smallest annual inflation increase in nearly a year at 7.1%.
Rising expectations for smaller and slower Fed rate hikes sent U.S. Treasury yields sharply lower and helped lift rate-sensitive gauges like the S&P 500 growth index (.IGX), up 1.18%, and the S&P 500 real estate index (.SPLRCR) up 2.04% to their highest intraday levels in nearly three months. The real estate sector notched its biggest daily percentage gain in two weeks as the best performing of the 11 major sectors.
Morgan Stanley’s chief U.S. economist Ellen Zentner now sees even smaller Fed rate hikes, of 25 basis points at the central bank’s February meeting, and no further increases in March, leaving the peak fed funds rate at 4.625%.
Still, equities pared gains ahead of the Fed’s policy statement on Wednesday, in which the central bank is widely expected to announce a 50 basis point rate hike.
“There was some excitement early on that the CPI number was once again below expectations – it shows some sequential cooling – but once we saw that initial pop, stock investors kind of reassessed,” said Jason Ware, chief investment officer at Albion Financial Group in Salt Lake City, Utah.
“That probably took some of the steam out of the markets once investors realized tomorrow very well may be (Fed Chair) Jerome Powell throwing cold water on the rally today.”
The Dow Jones Industrial Average (.DJI) rose 103.6 points, or 0.3%, to 34,108.64, the S&P 500 (.SPX) gained 29.09 points, or 0.73%, to 4,019.65 and the Nasdaq Composite (.IXIC) added 113.08 points, or 1.01%, to 11,256.81.
Energy (.SPNY), up 1.77%, was among the best performing S&P sectors on the day as the softer-than-anticipated inflation data sent the dollar lower and boosted crude oil prices.
The consumer inflation numbers follow November’s producer prices report last week, which was slightly higher than expected but pointed to a moderation in the trend.
Still, some questioned whether the trend in prices could continue.
“Today’s CPI print is incrementally good, but it needs to be sustained,” said Venu Krishna, head of U.S. equity strategy at Barclays in New York.
“There is a big question mark whether we can really come to the 2% inflation (Fed target). Perhaps we live in a world in which it will be higher and that means rates will be higher and then multiples will certainly be lower.”
Moderna Inc (MRNA.O) surged 19.63% after the biotechnology firm’s experimental vaccine in combination with Merck & Co Inc’s (MRK.N) blockbuster drug Keytruda showed promising results in a skin cancer study. Merck shares advanced 1.78%.
Pinterest Inc (PINS.N) jumped 11.90% after Piper Sandler upgraded the social media platform’s stock to “overweight” from “neutral.”
Advancing issues outnumbered declining ones on the NYSE by a 2.83-to-1 ratio; on Nasdaq, a 1.49-to-1 ratio favored advancers.
The S&P 500 posted 18 new 52-week highs and 1 new lows; the Nasdaq Composite recorded 92 new highs and 212 new lows.
