Wall Street Closes Sharply Higher as Inflation Data Fuels Investor Bets on Fed Rate Hike Slowdown

A trader works on the floor of the New York Stock Exchange (NYSE) in New York City on Oct. 7, 2022. (Brendan McDermid/Reuters)

Wall Street registered its biggest rally since 2020 on Thursday following October’s inflation report suggesting a peaking of decades-high consumer prices, and investor optimism regarding a possible slowing down on Fed rate hikes.

The S&P 500 closed Nov. 10 at 3956.37 with a 5.54 percent increase; Dow Jones by 3.40 percent at 33,715.37 with an uptick of 1,201 points; and the Nasdaq Composite Index by 7.35 percent at 11,114.15, gaining 760.97 points. The 12-month Consumer Price Index (CPI) for October slowed down to 7.7 percent, the fourth straight month of decline since peaking at 9.1 percent in June 2022, according to the latest inflation data from the Bureau of Labor Statistics (BLS).

“It certainly was better news and makes it even more likely that the Fed can step down to 50 basis points next month (which is their strong preference),” Former New York Federal Reserve President Bill Dudley told CNN.

However, Dudley noted that other reports like the Cleveland Fed’s median CPI only showed a plateauing of prices at 7 percent growth year-over-year. “So [it’s] a better reading that has generated a relief rally, but doesn’t change the picture in a significant way (as most monthly reports don’t),” he said.

In January, the Federal Reserve’s benchmark interest rate was at 0.8 percent. By early November, this was pushed up to a range of 3.75–4.00 percent through multiple rate hikes.

The October inflation report registered a 0.4 percent change in consumer prices from the prior month. The 7.7-percent annual change was lower than September’s 8.2 percent. Dow Jones economists had expected a 0.6 percent change monthly and 7.9 percent annually. The core CPI going up by 0.3 percent for the month, and 6.3 percent yearly, is also a significant undershoot.

Midterm Results

Wall Street investors are now awaiting the full results of the Nov. 8 elections.

Many experts were betting on the GOP winning both the House of Representatives and the Senate. But even though Republicans looked set to take control of the House according to early results, the fate of the Senate is still hanging in the balance and can swing either way. As of 4:45 p.m. EST, Republicans had secured 210 seats in the House, moving closer to the 218-seat majority. Democrats were behind with 193 seats. In the Senate Race, Republicans won 49 seats, with Democrats trailing close by with 48 seats.

If the Senate ends up 50–50 once more, Democrats will carry the advantage as Vice President Kamala Harris’s tie-breaker vote will keep the party in control.

“The fact that we didn’t see a Republican landslide as a lot of people had expected does now raise questions about whether or not the Democrats will maintain control of the Senate,” Danni Hewson, financial analyst at AJ Bell, told Reuters.

“You’re in a slightly different situation and it does look like the Biden Presidency has not been dealt a massive blow by these midterm elections, so the markets are in a wait-and-see mode.”

A divided government is usually seen as favorable for the stock market. Since 1950, the S&P 500 index has risen by 17.5 percent in the year following a midterm election that resulted in a Republican-controlled Congress and a Democrat president.

Divided Government

Speaking to Reuters, Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions, said that the likely election result is “gridlock in some shape or form.”

As a divided government reduces the risk of “significant legislative changes,” it also diminishes policy uncertainty, which is a positive for risk assets.

“Looking into mid-late 2023 we may see delayed effects of the election as the budget and debt ceiling debate come into focus,” he said.

“Should Republicans take one or both chambers of Congress, expect a potentially contentious bout of political brinksmanship that could contribute to some market volatility in 2023 before an eventual resolution is reached.”