Nasdaq gains more than 7%, S&P, Dow marks best day in over two years in CPI relief rally

Matteo Colombo

Wall Street's major indices staged their best rally of the year on Thursday after data showed core and headline consumer inflation were weaker than expected in October, fueling hopes that the Federal Reserve could slow down its aggressive path of rate hikes.

The Nasdaq Composite (COMP.IND) closed 7.35% higher at 11,114.15 points as rate-sensitive megacap technology firms gained across the board. The tech-heavy index added 760.97 points, its largest one-day point gain on record.

The benchmark S&P 500 (SP500) gained 5.54% to end at 3,956.37 points. The Dow (DJI) jumped 3.7% to close at 33,715.37 points. The blue-chip index advanced 1,201.43 points, its sixth-largest one-day point jump ever.

In terms of percentage change, the Nasdaq marked its best intraday performance since March 24, 2020, while the S&P clocked its best day since April 6, 2020. Meanwhile, the Dow notched its best daily performance since May 18, 2020.

All 11 S&P sectors ended in the green, with broad-based gains across the board. Technology was the top gainer. Heavyweight sector Consumer Discretionary rose more than 7%, helped by Amazon and other e-commerce stocks. Energy gained the least.

Bond markets also rallied on the inflation data. The 10-year Treasury yield (US10Y) ended the session down 33 basis points at 3.82%. The 2-year yield (US2Y) closed 30 basis points lower at 4.33%. Exchange traded funds linked to Treasury yields have jumped sharply higher.

Meanwhile, the Dollar Index (DXY) fell 2.3% to 107.96.

Core CPI Points to a More Dovish Fed

Stocks soared after the U.S. Labor Department reported a 0.3% month-over-month rise in October's core Consumer Price index, compared to forecasts for 0.5%. That was the softest reading since September 2021 for core CPI, which excludes volatile food and energy prices.

For much of this year, CPI reports have been poorly received by the markets, as inflation has remained stubbornly high and has led to the Federal Reserve hiking rates by 75 basis points for four straight meetings.

The moderation in prices in Thursday's report could give the Fed more breathing room in terms of slowing down the pace of rate hikes. According to the CME FedWatch tool, markets are now pricing in a 80.6% probability of a 50-basis-point hike rather than a 75-point one at the central bank's policy meeting next month.

"Today marked the best day for the most-shorted stocks since April 2020. Thanks to today’s inflation numbers, the Fed is now expected to start cutting rates in September of 2023. This is causing stocks to fly as investors bet on a quick end to the Fed’s aggressive hiking cycle," Seeking Alpha contributor Leo Nelissen said.

"However, this may be short-sighted," Nelissen added. "The Federal Reserve is unlikely to pivot before inflation has come down meaningfully. The best case, for now, is a steep decline in inflation towards 2-3% in early 2023. However, that is unlikely as a steep decline in prices can only be forced through severe demand destruction. That is not bullish."

Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management, also had some words of caution.

"We are preparing for an environment where interest rates remain higher for longer. Investors should be more concerned with the effect that rising rates into a decelerating economy has on their portfolio values rather than the current level of inflation," Landsberg told Seeking Alpha.

"Thursday's softer-than-expected inflation number confirms our belief that inflation is yesterday's story. Inflation is still way above the Fed's 2% target and we believe the Fed will keep their word and continue to raise interest rates," Landsberg said.

Meanwhile, San Francisco Fed President Mary Daly said in an online discussion that the inflation report was "just one piece of positive information," and that the central bank couldn't be complacent.

Jobless Claims Also Rise, While FTX Saga Rolls On

In other economic data, the number of Americans filing for weekly jobless claims rose more than expected, which also added to the hopes of a Fed pivot.

Investors also kept an eye on cryptocurrency markets on Thursday, with the FTX saga still ongoing. A selloff in crypto had weighed on the major indices on Wednesday

Winners and Losers

Among active movers, U.S. homebuilders advanced even as long-term mortgage rates re-crossed the 7% mark for the week ending November 10. D.R. Horton, KB Home, Lennar and PulteGroup all gained more than 10%. Biopharma Veru cratered after an FDA advisory committee voted against its oral COVID-19 therapy.

In earnings news, favorably received quarterly reports sent shares of electric vehicle makers Nio and Rivian higher.