[1/5]A trader reacts as a screen shows the federal funds rate announcement on the floor of the New York Stock Exchange (NYSE) in New York City, US, July 26, 2023. REUTERS/Brendan McDiarmid/File Photo Obtaining licensing rights
NEW YORK (Reuters) – A moderate U.S. inflation report raises hopes that the Federal Reserve can lower consumer prices without hurting the economy, a so-called mild environment that investors believe will benefit stocks and bonds.
Both asset classes rose in November after months of volatility, fueled by hopes that the Federal Reserve is unlikely to deliver further interest rate hikes that have spurred volatility across markets since early last year.
Inflation data released on Tuesday supported the view that a turning point is near: Consumer prices were unchanged month-on-month for October, the first such reading in more than a year and a lower figure than analysts had expected.
At the same time, there were few signs that tightening monetary policy was severely hurting the economy, supporting the idea that prices could fall further without hurting growth.
“The broader market has been challenged by the consensus negative view on both recession and inflation,” said Eric Coby, chief investment officer at North Star Investment Management Corp. “The reality tells a different story.” This looks like a mild moment for the entire market.
The data fueled a strong rise in stocks and bonds. The benchmark Standard & Poor’s 500 index ended 1.9% higher during the day, its largest single-day rise since late April. The S&P 500 rose 9% from its October lows, bringing its year-to-date gain to 17%. The benchmark 10-year yield, which moves inversely with bond prices, was at its lowest level since late September – having fallen more than 50 basis points from a 16-year high hit last month.
The jump in stock prices was accompanied by a wave of bullish bets in US stock options markets, as traders ramped up their bets on further gains and threw in the towel on bearish positions.
Call options, which benefit from rising prices, outnumbered bearish trades by their largest margin in three-and-a-half months, according to Trade Alert data.
Meanwhile, investors rushed to cover bearish bets — especially on high-growth and technology stocks that have suffered amid rising interest rates.
The Thomson Reuters US Shorter Index (.TRXUSPMSHRT) rose 6.5%, its biggest single-day gain in a year.
“Crowded short names are also increasing a lot…that to me is a lot of chasing and covering,” said Daniel Kirsch, head of options at Piper Sandler.
Some parts of the market that have underperformed this year, such as the small-cap-focused iShares Russell 2000 ETF (IWM.P), attracted heavy bullish options activity on Tuesday, said Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets.
The Russell 2000 Index (.RUT), tracked by the ETF, rose 5.4% on Tuesday, its biggest daily gain in a year. The index rose 2.1% this year.
Dovish forecasts
Rising interest rates have been a concern for investors since the Federal Reserve began its rate-hiking cycle in March of 2022. Higher interest rates tend to slow economic growth by raising the cost of borrowing for businesses and consumers. They also reduce the attractiveness of stocks by raising bond yields and making fixed income and other yielding investments more competitive with stocks.
However, in the wake of the inflation data, Fed funds futures traders on Tuesday expected the Fed to forego any further increases and implement about 100 basis points of interest rate cuts in 2024, compared to 75 basis points of cuts before the index report. Consumer prices.
This is consistent with data-driven expectations. According to BofA Global Research’s monthly survey on Tuesday, 76% of fund managers were convinced that the Fed had ended its interest rate hike cycle, up from 60% in October and the highest level since the survey began tracking the topic in May.
Thomas Hayes, head of hedge fund Great Hill Capital, said the CPI data “tells us the Fed is done, there’s nothing left to do here.”
However, some investors believe it is too early to declare victory in the battle against inflation.
“Inflation remains too high and the labor market remains too tight for the Fed… to declare an end to its rate hike cycle,” wrote Brian Rose, chief US economist at UBS Global Wealth Management. “Such an announcement is likely to come after at least three months unless the data takes a sudden turn to the weaker side.”
Others expressed concern that the Fed would risk hurting the economy by keeping monetary policy too tight for too long.
“The question now for the Fed is whether it still believes that slowing the economy toward recession is necessary to fully overcome inflation,” said Jamie Cox, managing partner of Harris Financial Group. “I certainly hope not.”
(Reporting by Louis Krauskopf and Saqib Iqbal Ahmed – Reporting by Mohammed for the Arabic Bulletin) (Additional reporting by Davide Barbuscia in New York and Ankika Biswas in Bengaluru) Editing by Nick Zieminski and Stephen Coates
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