Wall Street gains on Tuesday following new CPI reading

The stocks on Wall Street rose on Tuesday for the second time this week following the consumer price index (CPI) publication.

The Dow Jones ended the trading session at 34,108.64, gaining 103.60 points or 0.30 percent. The S&P 500 gained 29.09 points or 0.73 percent compared to the previous day, finishing at 4,019.65. NASDAQ Composite posted the highest gain among Wall Street’s major indices by gaining 113.08 points or 1.01 percent and closed at 11,256.81.

CPI reading on Tuesday showed that November’s consumer prices went up 0.1 percent, as opposed to 0.4 percent in October. Previously, economists agreed on a 0.3 percent increase in CPI. It was also the smallest year-over-year consumer price increase recorded in 2022.

Strategists at Morgan Stanley wrote in a note that the lower increase in consumer prices in November had confirmed October’s inflation data, which indicated that the inflation pressures had started to decline. This finding can justify the Federal Reserve’s plan to scale back on its rate hike size on Wednesday.

"Tomorrow's reduction in the pace of tightening to 50 (basis points) was already telegraphed, and with the downtrend in inflation becoming entrenched, the FOMC can set its sights squarely on the labor market,” the note said.

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The U.S. central bank raised its benchmark interest rates at every FOMC meeting starting March this year, with an aggressive 75 basis points increase in the last four meetings. Fed officials, however, have made public statements about the agency’s plan to reduce the hike size.

Nevertheless, they said it was likely for the Fed to maintain a high-interest rate throughout 2023 to manage inflation. Analysts have predicted that the terminal Fed funds rate in 2023 will be over five percent.

The CPI news also affected stocks in other parts of the world. The European STOXX 600 index rose by 1.29 percent or 5.62 points and closed at 442.60 on Tuesday. MSCI World Index — an index that measures stocks across 23 developed markets — gained a meager 0.9 percent during closing.

BMO Wealth Management head investment strategist Yung-Yu Ma said the new CPI data was “good news” for the inflation worry. However, the equity market's reaction displayed investors’ anticipation of what would be coming next.

"It’s all a balancing act, which we believe points to near-term choppy markets even though the improving inflation backdrop adds a positive bias,” Ma added.

Bond yields, greenback, commodities

On the other hand, the Treasury yields dropped following the latest CPI reading. The 10-year notes went down by 9.7 basis points to 3.516 percent. The 30-year notes fell by 5.1 basis points to 3.525 percent. Meanwhile, the two-year notes — which are usually linked to the projection of benchmark interest rate — declined by 17 basis points to 4.233 percent.

The U.S. dollar index posted a one percent decline against several major currencies. Despite strengthening significantly in the first three quarters of 2022, the greenback declined in the fourth quarter. Analysts said it was because most investors believed that the U.S. inflation had reached its peak.

The greenback dropped against the euro and the yen on Tuesday. Its exchange rate with the sterling was down to $1.234. The sterling rose by 0.6 percent after data showed that the unemployment rate in the U.K. had increased.

The commodities prices went up along with the stock market. The U.S. crude oil rose 3.51 percent to $75.74 a barrel, while Brent went up 3.69 percent to $80.87 a barrel. Investors reported growing concerns about the possibility of supply disruptions, especially after news of a massive leak in the Keystone crude pipeline.

Gold prices also rose following November’s CPI publication. Spot gold went up 1.6 percent to $1,809.61 an ounce, while gold futures rose 1.77 percent to $1,813.90 an ounce.