Stocks Leap on Cooling Inflation

NEW YORK (AP) -- Stocks are leaping Tuesday after an encouraging report on U.S. inflation sent waves of relief through Wall Street.

The S&P 500 was 1.6% higher and near its best level in two months. The Dow Jones Industrial Average was up 397 points, or 1.2%, as of 9:45 a.m. Eastern time, and the Nasdaq composite was 2.1% higher.

The highly anticipated report showed not only that overall inflation slowed last month from September, but so did a key underlying figure that economists see as a better indicator of future trends. The slowdown bolstered bets on Wall Street that inflation is cooling enough for the Federal Reserve to finally be done with its market-crunching hikes to interest rates.

Such hopes lifted all kinds of investments, and more than 90% of the stocks in the S&P 500 climbed in a widespread rally. Technology and other high-growth stocks tend to get some of the biggest boosts from easier rates, and a 2.5% jump for Amazon and 2.1% rise for Nvidia were two of the strongest forces lifting the S&P 500.

Stocks of smaller companies also got a huge boost, with the Russell 2000 index of small stocks potentially on track for its best day of the year. It surged 3.6%. Smaller companies are often seen as more dependent on borrowing cash to grow, which makes them particularly vulnerable to high interest rates.

The inflation data helped to buoy hopes on Wall Street that the Fed may actually pull off the balancing act of slowing the economy and hurting investment prices just enough to grind down inflation, but not so much as to cause a painful recession. That is still not a certainty, though.

The Fed has yanked its main interest rate to its highest level since 2001, up from virtually zero early last year, in hopes of getting inflation back down to 2%. The moves have already sent shockwaves through the financial system, with stocks still down from their peak in early 2021 and several high-profile U.S. bank failures shaking confidence earlier this year.

Even if it doesn't hike rates any more, the Fed is likely to keep its main rate high for a while.

Still, the inflation report was unabashedly encouraging news for Wall Street. After the report's release, Treasury yields in the bond market tumbled immediately as traders flooded into bets that the Fed won't hike rates again. That also pushed up the expected timetable for the Fed's first cut to rates, which can act like steroids for financial markets and provide oxygen across the financial system.

"Ain't no reason to believe the last inflation mile will be the most difficult," said EY Chief Economist Gregory Daco. "Slower consumer demand, reduced housing rents, lower profit margins, easing wage growth and restrictive monetary policy represent the ideal disinflationary combo heading into 2024."

The yield on the 10-year Treasury tumbled to 4.45% from 4.64% late Monday. That's a significant move for the bond market, particularly after the yield briefly topped 5% last month to reach its highest level since 2007.

Much attention will be on how overall prices for consumers rose 3.2% in October from a year earlier, a slowdown from last year's peak above 9%. But for Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management, a more important indicator may be a figure buried under the surface related to housing costs.

That showed a meaningful deceleration, and Rosner said, "This should solidify the Fed on hold in December."

Traders now see zero chance of an increase at the Fed's next meeting on Dec. 13, down from a 14.5% probability just a day ago, according to data from CME Group.

The prospect of no more rate hikes reverberated across all kinds of financial markets.

The value of the U.S. dollar fell against many other currencies, further slowing its strong run since the summer, while the price of gold rose 0.8%. Higher interest rates tend to hurt gold because the metal, which pays its investors zero income, looks less attractive as an investment when bonds are paying higher yields.

Elsewhere on Wall Street, Home Depot rallied 5.3% after it reported stronger profit for the latest quarter than analysts expected. The Atlanta-based retailer, though, also said consumers are reticent to purchase big-ticket appliances, often bought on credit, which has grown very expensive as a result of higher interest rates.

Other big retailers, including Target and Walmart, will report their results later this week. They're at the tail end of an earnings reporting season for the summer that has been better than analysts expected, with the first growth likely for S&P 500 companies in a year.

In stock markets abroad, indexes were mostly higher across Europe and Asia.