Stocks come back strong, shrugging off hot inflation reading
U.S. stocks soared Thursday, with gains of 2% and above across all major indexes, after falling sharply in opening trading on an unexpectedly hot inflation report that strengthened the Federal Reserve's position on the need for more aggressive interest rate hikes.
The S&P 500 rose 84 points, or 2.4%, to close at 3,662. The Dow Jones Industrial Average rose 785 points, or 2.7%, and the Nasdaq Composite climbed 2%. The S&P 500 is down 26% this year and close to a two-year low.
The Dow's swing of more than 1,300 points during the day was its largest since March 2020, as was S&P 500's percentage move from low to high.
Stocks in Europe also flipped from losses caused by the U.S. inflation data, while Treasury yields pulled back from their initial surge. The value of the U.S. dollar against other currencies sank after initially jumping.
They're the latest jagged, back-and-forth moves for markets, which have been swinging sharply due to all the uncertainties about economies around the world and how badly higher interest rates will hurt them.
Is inflation heating or cooling?
Analysts said some data points buried deep within the inflation report may be offering hope that inflation is on its way to marking a peak and then easing, even though current conditions look dour. Others said technical reasons could also be helping to support markets, as some investors closed out of trades betting on declines following the inflation report.
"Hopefully it's because people have dug into the details of the inflation report and noticed a few signs that we could get inflation relief by the end of the year," said Brian Jacobsen, senior investment strategist at Allspring Global Investments.
"Markets have talked themselves off a ledge, so to speak, and they're a bit more hopeful," said Kristina Hooper, chief global markets strategist at Invesco.
Most investors came into the morning already expecting the Fed to hike its key overnight interest rate by three-quarters of a percentage point next month, which would be its fourth straight hike that was triple the usual size.
"Not only is the Federal Reserve going to raise rates by 75 bps next month, but there is now a possibility that they will raise rates by another 75 bps in December," predicted Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.
Minutes from the Fed's last meeting, released Wednesday, underscored the central bank's commitment to taming "unacceptably high" inflation.
Higher rates make buying a house, car or anything else purchased on credit more expensive, and the hope is that will slow the economy and job market enough to undercut inflation. But higher rates take a notoriously long time to take full effect, and the Fed risks causing a recession if it ends up going too far.
As the day progressed, and investors had more time to dig into the inflation report's details, analysts said they perhaps saw some glimmers of hope. Even though what's called "core" inflation accelerated last month, overall inflation including food and energy prices slowed by a touch.
September retail sales data to be released Friday could give a clearer picture of where prices are hottest and how Americans are reacting.
The Fed and other central banks in Europe and Asia have raised rates by unusually big margins to cool inflation that is at multidecade highs, but traders are afraid they might tip the global economy into recession.
"While inflation is still way too high, and core inflation is at a new generational high, the Fed is unlikely to increase the increment of its rate hikes," Bill Adams, Chief Economist for Comerica Bank, said in a report.
Delta Air Lines shares jumped more than 4% premarket after it reported a $695 million third-quarter profit. Atlanta-based Delta said higher average fares this summer and a lucrative credit-card business more than offset rising fuel costs. The airline forecast that revenue during the final three months of the year will top pre-pandemic levels.
Dollar edges back
In energy markets, benchmark U.S. crude gained 13 cents to $87.40 per barrel in electronic trading on the New York Mercantile Exchange.
The dollar's exchange rate has been rising against other currencies due to the Fed's rate hikes and recession fears. The yen's weakness has prompted expectations Japan's central bank might intervene for a second time to prop up the exchange rate following an intervention in September.