S&P 500, Dow, Nasdaq surge as inflation shows signs of cooling, Treasury yields sink

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NEW YORK (AP) — Stocks are galloping toward their best day in years Thursday as exhilaration sweeps Wall Street and financial markets worldwide after a report showed inflation in the United States slowed last month by even more than expected.

The S&P 500 was 3.3% higher in early trading, while the data sent prices immediately jumping in markets for everything from metals to European stocks. Even bitcoin clawed back some of its steep plunge from prior days caused by the crypto industry’s latest crisis of confidence.

The Dow Jones Industrial Average was up 713 points, or 2.2%, at 33,227, as of 9:43 a.m. Eastern time, while the Nasdaq composite soared 4.4%.

The most dramatic action may be happening in the bond market, where Treasury yields sank sharply as investors pared bets for how aggressive the Federal Reserve will be in hiking interest rates to get inflation under control.

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Those big rate hikes by the Fed have been the main reason for Wall Street’s struggles this year and are threatening a recession.

The yield on the 10-year Treasury, which helps set rates for mortgages and other loans, fell to 3.88% from 4.10% late Wednesday, which is a big move for the bond market. The two-year yield, which more closely tracks expectations for Fed action, dropped to 4.33% from 4.58%.

Cooler inflation could mean smaller rate hikes

All the moves stemmed from a U.S. government report showing that inflation slowed to 7.7% last month from 8.2% in September. It’s the fourth straight month of moderation since inflation hit a peak of 9.1% in June, and it was an even better reading than the 8% that economists were expecting.

Perhaps more importantly, inflation also slowed more than expected after ignoring the effects of food and energy prices. That’s the measure that the Fed pays closer attention to. So did inflation between September and October.

“The month-on-month rate of inflation is much more informative,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “On that measure, inflation is still high, but not scary high.”

Slower inflation could keep the Fed off the most aggressive path in raising interest rates. It’s already raised its key lending rate to a range of 3.75% to 4%, up from close to zero in March.

By raising rates, the Fed is intentionally trying to slow the economy and jobs market in hopes of undercutting inflation, which hit a four-decade high in the summer. The risk is that it can create a recession if it goes too far, and higher rates drag down on prices for stocks and other investments in the meantime.

Higher rates have been hitting high-growth tech stocks, cryptocurrencies and other investments seen as the riskiest or most expensive particularly hard.

One report, though, isn’t a trend

While Thursday’s report on inflation was an encouraging sign, analysts also cautioned against premature belief that the battle against inflation is over.

“The Fed was adamant that it won’t hit the brakes on rate hikes until inflation slows, and while the market’s rally indicates investors may see light at the end of the tunnel, it will get one more reading before its decision next month,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office. “Remember that even as we see a slowdown, prices remain elevated and have a long way to go before normalizing.”

Another potentially market-shaking report will also hit Wall Street Friday, when the latest reading arrives on how much inflation U.S. households see coming in future years. Fed Chair Jerome Powell has said he’s paying particularly close attention to such expectations.

One of the reasons the Fed has been so aggressive about hiking rates is because it wants avoid a debilitating cycle where expectations for high inflation push people to change their behaviors in ways that lead to even higher inflation.

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Other factors to watch

Stocks have swung sharply this week, with several factors pushing the market both up and down. On one hand, investors hope Tuesday’s elections may result in a Washington where control is split between Democrats and Republicans. That could prevent the kind of sweeping economic changes that make investors nervous, but the outlook for that is still uncertain as votes are still being counted.

Huge losses in the crypto world, meanwhile, were threatening to spill over into other markets and at least dent confidence among investors. Bitcoin was sitting below $16,500 shortly before the inflation report, down from roughly $20,000 a week ago and nearly $69,000 a year ago. It quickly jumped $1,000 within a half hour before settling back around $17,400.

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Much of this week’s furor for crypto has centered on one of the bigger trading exchanges, FTX, where the industry’s latest crisis of confidence caused customers to scramble to pull out their money. Sharp drops in crypto prices can trigger even steeper declines because of how much money many crypto investors have borrowed to make trades, which can amplify market moves.

Lenders are likely forcing those investors to put up more collateral, something called a margin call, and the process could take weeks to play out, according to strategists at JPMorgan. One challenge for the market is that the number of big, financially strong players that can bail out the weaker ones is shrinking, according to the strategists.

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AP Business Writers Joe McDonald and Matt Ott contributed.