US stocks rose after slower inflation data reinforced bets that the Federal Reserve will skip interest rate hikes in October. The S&P 500 erased September losses as two-year Treasury yields fell to 4.86%. “The inflation battle is hardly over, but today’s numbers are a step in the right direction,” said experts.
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Stocks rose and short-dated Treasury yields fell after slower-than-anticipated inflation data reinforced bets the Federal Reserve will refrain from raising interest rates in October.
Equities bounced, erasing the September decline in the S&P 500. The yield on two-year notes dropped two basis points to 4.86%. Money markets now see a less than 40% chance of a Fed hike next month. The dollar edged down, but was still set for its best month since June.
The Fed’s preferred measure of underlying inflation, the personal consumption expenditures price index excluding food and energy, rose a less-than-expected 0.2% in August. The prior month was also revised lower.
“This is good news for investors worried about the recent surge in bond yields, and it bolsters the case for not hiking in October,” said David Russell at TradeStation. “We might have seen peak hawkishness from the Fed given the recent jump in rates.”
However, it’s also relatively “old data” at this point that doesn’t reflect this month’s surge in diesel prices, he added.
“The inflation battle is hardly over, but today’s numbers are a step in the right direction,” said Bret Kenwell at eToro. “A meaningful retreat in oil prices would help ease inflationary pressure, but the immediate focus is on Treasury yields. This report may finally take some air out of that move.”
Data also showed consumer spending rose in August at the fastest pace in over a year, helping to power the economy through persistent inflation.
“Given the mixed nature of the data, it shows that the Fed was probably correct in raising rates this month, but if the inflation data improves they might be able to skip a meeting or at least raise rates less than the three times in a row that many were worried about,” said Chris Zaccarelli at Northlight Asset Management.
Meantime, companies stepped up hiring in September, another sign that the economy may be picking up. The government’s employment report due Friday, which includes public-sector hiring, is expected to show employers added a solid 90,000 jobs in September.
“Friday’s jobs report and next month’s earnings season should offer more insight into whether that resilience is holding up,” said Kenwell.
The catalyst for recent stronger hiring has, unsurprisingly, been the economy itself. Demand metrics highlight an extended and feverish pace of capital spending as well as improved consumer spending. That backdrop has allowed the Fed to turn its policy focus squarely toward inflation.
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