Inflation is cooling, and Wall Street loves it

New York
CNN business

Stocks rose on Tuesday morning after the US government reported that wholesale prices rose much less than expected. The news came just days after another report showed the pace of consumer price increases was also slowing.

The Dow was up 250 points, or 0.7%, in late morning trading. The S&P 500 and Nasdaq rose 1.3% and 2% respectively. Investors expect that cooling inflationary pressures will lead the Federal Reserve to raise interest rates by smaller amounts in the coming months, after four historically significant increases in a row.

Strong earnings at retail giant Walmart ( WMT ), one of the 30 components of the Dow, helped boost market sentiment.

Tech stocks also got a boost from surprise news that Warren Buffett’s Berkshire Hathaway ( BRKB ) bought a stake in chip giant Taiwan Semiconductor in the third quarter.

Shares of Taiwan Semi (TSM) rose more than 12%. The benchmark Philadelphia Semiconductor Index ( SOX ), which includes Taiwan Semi ( TSM ), Intel ( INTC ), AMD ( AMD ), Nvidia ( NVDA ) and other chip leaders, rose 4%.

But it’s the good news about inflation that gives investors the biggest reason to cheer. Traders are now betting it’s a near miss for the Federal Reserve to raise rates by just half a percentage point, instead of three-quarters of a point, at its next meeting on Dec. 14.

Traders are pricing in an 85% chance of a so-called 50 basis point hike at that meeting, compared with a 30% chance a month ago, according to CME federal funds futures.

In addition to the more benign inflation numbers, investors also appeared to be taking comfort from Fed Vice Chairman Lael Brainard’s comments on Monday.

Brainard told a Bloomberg News event that “it makes sense to move at a deliberate, data-driven pace” regarding future rate hikes. Those comments calmed investors after another Fed official’s comments on inflation and interest rates.

Fed Governor Christopher Waller told attendees at a UBS event in Australia that “we have a long, long way to go to bring inflation down” and added that “rates will continue to rise and remain high.” for a moment.”

However, some experts worry that the market is getting too excited about the latest inflation figures. The Fed is clearly still more concerned about inflation than the prospect of its aggressive rate hikes slowing the economy.

“There is less if it is clear [the inflation reports] it will be enough to make the Fed reconsider how far they go on raising rates,” said Andrzej Skiba, head of US fixed income at RBC Global Asset Management. “The Fed will need more data. It’s really about inflation, and it’s all about them. They’ll be glued to their screens for new data.”

Others agree that the Fed won’t suddenly decide that it can claim victory in the war on inflation any time soon. This means that the market needs to get used to the fact that interest rates will continue to rise and may remain high for some time.

“Bringing down inflation is going to be a bigger focus than it has been in the last fifteen years,” Ashish Shah, Goldman Sachs’ chief public investment officer, said in a Monday webcast.

Shah said investors should not expect a “Goldilocks”-type scenario where the Fed comes to the rescue of markets with rate cuts and bond purchases (a policy known as quantitative easing) to lower interest rates.