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Why did US stock market rally after hot inflation numbers?

The gains followed the release of consumer pricing data, which exceeded expectations and supported another 75 basis-point rate hike by the Federal Reserve.

Why did US stock market rally after hot inflation numbers?
So far, the US Fed has raised interest rates by 300 basis points in 2022.

On a day when the US September inflation numbers came in above expectations, Dow 30 index registered an over 800 points increase while Nasdaq clocked more than 2% gain. The massive turnaround has come after hot inflation reading. In August, US inflation was rising by 8.3% but in September it rose by 8.2%, showing hardly any relevant dip in price rise. Most importantly, September core inflation, which excludes food and energy, reached a 40-year high, supporting the Federal Reserve’s decision to keep up its aggressive interest-rate increases.

“The inflation reading turned out to be much higher than expected. In response, equity indices first dived as expectations of future interest rates rose. However, soon afterward, they shot up. Investors seem to be wondering what could be behind the biggest daily reversal in stocks since 2020. The exact reason for the sudden market reversal is unknown, but it seems that a lot of presumably positive news for the market came together almost at once,” says Daniel Kostecki, senior market analyst, Director of Polish branch of Conotoxia.

The US Fed has already raised rates by 300 basis points in 2022 and even though the inflation doesn’t look tamed, US stocks surged posting big gains on some stocks.

The gains following the release of consumer pricing data, which exceeded expectations and supported another 75 basis-point rate hike by the Federal Reserve, were the best for the S&P 500 since July 2009.

Some investors attributed it to traders covering their aggressively short positions in the market once the data was released. Stocks were already down 25% year to date before Thursday’s recovery, leading some on Wall Street to believe that most of the damage had already been done. Better-than-expected earnings may also have contributed to the gains on Wall Street. Delta Air Lines Inc., Domino’s Pizza Inc., and Walgreens Boots Alliance Inc. gained on better-than-expected results.

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It could be a technical factor too as the S&P 500 had given back half of its post-pandemic surge at a session low of 3,491.6, which set off a buying frenzy by computer-based funds.

Also Read: US inflation remains high paving way for Fed to hike rates again

Many investors still believe that even if the stock market is ‘oversold,’ it pays to stay bearish and hold cash. Going forward, investors will pay attention to what the banks are facing as the Fed tightens, which might compel higher bad debt provisioning and hinder economic growth. Later on Friday, major Wall Street banks including JPMorgan Chase & Co. and Citigroup Inc. will report, and banks are anticipated to disclose the largest profit decline of any S&P 500 Index sector.

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First published on: 14-10-2022 at 15:36 IST