Movement was even fiercer in the bond market, where Treasury yields fell sharply after a report showed that U.S. consumers paid 3.3% more for food, insurance and all other goods last month than they did a year earlier. Economists had expected inflation to stay at 3.4%.
For Wall Street, slowing inflation would not only help American households struggling to keep up with soaring prices, it would also pave the way for the Federal Reserve to cut its key interest rate. Such a move would ease pressure on the economy and boost investment prices.
The inflation data spurred hopes of upcoming interest rate cuts, boosting the value of everything from bitcoin to gold and copper, while also easing fears among U.S. stock investors.
Few expect the Fed to start cutting interest rates at its latest meeting, scheduled to end Wednesday afternoon. The Fed has been adamant that it needs an accumulation of data to show that inflation is progressing sustainably toward its 2% target.
“This is good news, but we need more,” said Lindsay Rosner, head of multisector investing at Goldman Sachs Asset Management.
But it’s welcome news, as progress in containing inflation appeared to have stalled earlier this year. Recent better-than-expected reports on the job market also raised concerns that upward pressure on inflation will remain. Of course, if inflation slows too quickly, it could also raise concerns that U.S. consumers will start spending too quickly, leading to a recession.
Traders are increasingly betting the Federal Reserve will cut interest rates as early as September, according to data from CME Group.
As a result, the sectors of the stock market that tend to benefit most from low interest rates have fared best in the broader stock market rally.
Smaller companies, which need to borrow to grow and have been hit harder by rising interest rates than larger companies, led the market. Small-cap stocks in the Russell 2000 index rose 2.8%.
Real estate stocks also soared. Lower interest rates mean less interest on bonds, which could sway potential investors toward dividend-paying property owners. Office owner Boston Properties Inc. rose 5.5%.
Lower interest rates could also lower mortgage rates, giving a boost to the housing market. Homebuilder D.R. Horton rose 4.8 percent.
Oracle rose 10.7%, leading Wall Street’s gains, despite reporting weaker-than-analysts-expected latest quarterly profit, which financial analysts cited as strong orders, including a contract related to artificial intelligence training.
The frenzy around AI has helped propel stocks to record highs despite concerns about high interest rates and the economic slowdown they could cause. Nvidia was again one of the strongest drivers of the S&P 500’s gains, rising 3.9%. The chip company has become a symbol of the AI ​​rush, with its market capitalization now exceeding $3 trillion.
The only company in the S&P 500 whose stock price rose more than Nvidia was Apple, up 5%. The company’s shares have surged over the past two days after an announcement that it would add several AI-related features to its operating system was initially met with a tepid reception.
In the bond market, the yield on the 10-year Treasury note fell to 4.26% from 4.40% late Monday and from 4.60% a few weeks ago. The yield on the two-year note, which is closer to the Fed’s expectations, fell sharply to 4.68% from 4.83% late Monday.
Overseas, European stock indexes surged after a strong U.S. inflation reading. Indices were mixed in Asia, where markets closed ahead of the data release. Japan’s Nikkei fell 0.7 percent as investors awaited the Bank of Japan’s latest interest rate announcement, scheduled for Friday.
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AP Business Writers Matt Ott and Elaine Kurtenbach contributed.
