NEW YORK — Stocks on Wall Street rose to a three-month high on Wednesday as investors cheered a government report that showed inflation cooled more than expected last month.
The encouraging inflation update has fueled speculation that the Fed may not have to be as positive about raising rates as feared. The central bank has been raising interest rates to slow economic growth in hopes of containing inflation, but if the Fed moves too aggressively, it could lead to a recession.
The S&P 500 gained 87.77 points, or 2.1%, to 4,210.24. The rally broke a four-day losing streak and pushed the benchmark to its highest level since early May. It is now nearly 15% above its mid-June low.
The Nasdaq Composite rose 360.88 points, or 2.9 percent, to 12,854.80, with many of its high-growth and expensive stocks particularly vulnerable to interest rates. It is up more than 20% from June.
The Dow Jones Industrial Average rose 535.10 points, or 1.6%, to 33,309.51.
Tech stocks, cryptocurrencies and other hardest-hit investments this year were the day’s biggest winners. Bitcoin rose 2.2% to just under $24,000.
Falling gasoline and oil prices were the main reasons for the inflation surprise last month. But even ignoring that and volatile food prices, so-called “core inflation” held steady last month rather than accelerating as economists had predicted.
The data encouraged traders to scale back bets on how much the Fed will raise interest rates at its next meeting. According to CME Group, they now see a half-percentage-point hike as the most likely outcome. A day earlier, they had bet on a more aggressive rate hike of 0.75 percentage point, the same as the previous two hikes.
The difference may not sound like much, but interest rates help determine price movements in financial markets. Higher interest rates tend to pull down prices of everything from stocks to commodities to cryptocurrencies.
Bond prices soared immediately after the inflation report, sending yields lower. The two-year U.S. Treasury yield, which tends to track Fed expectations, fell to 3.19% from 3.27% late Tuesday.
Yields on the 10-year note initially fell, but then stabilized in trade. It edged up to 2.79% from 2.78% late Tuesday. It remains below the two-year yield, a gap that many investors see as a fairly reliable signal of an impending recession.
Recession fears have intensified as the highest inflation in 40 years squeezes households and businesses around the world. Wall Street is closely watching whether the Fed can successfully put the brakes on the economy and cool inflation without slipping into recession.
“It’s a very sharp path that they’re trying to take here,” said Brian Nick, chief investment strategist at Nuveen.
To be sure, inflation remains painfully high and is expected to continue for some time. But Wednesday’s data still revived Wall Street, which faltered after Friday’s stronger-than-expected jobs report raised expectations for a more aggressive Fed. It has bolstered hopes that an inflation peak — and the Fed’s most aggressive rate hikes — may be on the horizon.
“This is a step in the right direction, but remember we still have a long way to go before inflation normalizes,” said Mike Loewengart, managing director of investment strategy at Morgan Stanley E-Trade.
The Fed will get more highly anticipated reports ahead of its next rate announcement on Sept. 21, which could also change its stance. These include a report showing hiring trends across the economy due Sept. 2, and the next update on consumer inflation due Sept. 13.
More immediately, this week’s report will show how inflation is doing at the wholesale level and whether U.S. households are still lowering their expectations for upcoming inflation, an influential data point for Fed officials.
Still, Wednesday’s inflation data helped European stocks climb to modest gains, while markets in Asia ended mostly lower. Germany’s DAX rose 1.2%, Japan’s Nikkei 225 fell 0.6% and Hong Kong’s Hang Seng fell 2%.
On Wall Street, companies in the real estate sector were strong, as hopes that a less aggressive Federal Reserve could mean less pressure on mortgage rates. Homebuilders DR Horton rose 4.7%, PulteGroup rose 4.6% and Lennar rose 3.6%.
Cruise lines and other travel-related companies have also made huge gains. Carnival rose 9.2% and American Airlines rose 3.1%.
Netflix, once a high-flying and high-growth stock, has plummeted to be the worst performer on the S&P 500 this year, rising 6.2%, but still down nearly 60% in 2022.
• Associated Press business writer Joe McDonald contributed.
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