US Stocks Rise as Inflation Cools, CPI Eases Fears

US stocks surged on Wednesday, January 16, 2025, as investors breathed a sigh of relief following the release of encouraging consumer price index (CPI) data. The S&P 500 jumped 1.8%, while the Dow Jones Industrial Average and Nasdaq Composite gained 1.7% and 2.5%, respectively, marking their best single-day performances since November 6, 2024. The rally was driven by a softer-than-expected monthly core CPI reading, which eased concerns about inflation and prompted traders to boost their expectations for Federal Reserve interest rate cuts.



The CPI report showed that overall inflation accelerated to 2.9% year-on-year in December, but the underlying inflation trends slowed to 3.2%. This was more encouraging than expected, as economists had forecast a 3.3% reading. The Federal Reserve pays more attention to the underlying number, and the slower pace of inflation was particularly welcome following worries that improvements in inflation had halted and that it would be tough to get all the way down to the Fed's 2% target.



The encouraging CPI data quashed speculation about near-term interest rate hikes and led to a significant drop in Treasury yields. The yield on the 10-year Treasury fell back to 4.65% from 4.79%, while the two-year Treasury yield dropped to 4.26% from 4.37%. This move in yields was considerable, as they had largely been climbing since September 2024, when they were below 3.65%.

The relief rally in US stocks was broad-based, with bank stocks leading the way. Wells Fargo, Citigroup, and Goldman Sachs reported stronger profits for the last three months of 2024 than analysts expected, helping to launch indexes to their best day in two months. The strong earnings reports from these big US banks also contributed to the overall market rally.



In addition to bank stocks, companies that would benefit from lower interest rates were also toward the front of the market. Builders FirstSource, a supplier of countertops and other building materials, rose 4.7% as investors anticipated easier mortgage rates, which could stimulate demand for housing-related products and services.

The encouraging US inflation data also helped to perk up stock indexes abroad by lowering the pressure on the global bond market. The FTSE 100 in London rallied 1.2%, while indexes in France and Germany rose 0.7% and 1.5%, respectively. The rally in US stocks and the easing of inflation fears contributed to a more optimistic outlook for global markets.

In conclusion, the recent CPI data has sparked a relief rally in US stocks, driven by easing inflationary pressures and the potential for Federal Reserve interest rate cuts. The rally was broad-based, with bank stocks and housing-related companies leading the way. The encouraging inflation data also contributed to a more optimistic outlook for global markets. As investors continue to digest the implications of the CPI report, they may adopt a more bullish stance on US stocks in the long term, taking advantage of potentially lower entry points and the opportunity to participate in a recovering market.