Hopes of a US interest rate cut on inflation data helps Nasdaq soar

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Stocks in the US were boosted by the latest inflation data cementing expectations that the US central bank, the Federal Reserve, is likely to cut interest rates at its meeting next week, pushing the broad-based Nasdaq Composite Index to a record high.

Fuelled by pricier used cars, hotel rooms and groceries, inflation in the United States edged slightly higher last month in the latest sign that some price pressures remain.

Consumer prices rose 2.7% in November from a year earlier, up from a yearly figure of 2.6% in October. Excluding volatile food and energy costs, so-called core prices increased 3.3%, the same as in the previous month. Measured month to month, prices climbed 0.3% from October to November, the biggest such increase since April. Core prices also rose 0.3% for a fourth straight month.

Wednesday’s inflation figures from the Labor Department are the final major piece of data that Federal Reserve officials will consider before they meet next week to decide on interest rates. The relatively mild November increase is unlikely to be enough to discourage the officials from cutting their key rate by a quarter-point.

Rate cut seen as likely

The probability of a rate cut next week, as envisioned by Wall Street traders, rose to 98% after Wednesday’s inflation report was released, according to futures pricing tracked by CME FedWatch.

“It’s generally in the ballpark of what the Fed would like to see,” said Jason Pride, chief investment strategist at Glenmede, a wealth management firm.

Last week, Fed Chair Jerome Powell suggested that with the economy generally healthy, the Fed could reduce its key rate slowly.

“We’re not quite there on inflation, but we’re making progress,” Powell said. “We can afford to be a little more cautious.”

With the job market cooling, growth in Americans’ wages has slowed from a nearly 6% annual pace in 2022 to about 4% now, a rate almost consistent with inflation at the Fed’s 2% target. Powell has said he doesn’t think the current job market is a driver of higher prices.

In September, the Fed slashed its benchmark rate, which affects many consumer and business loans, by a sizable half-point. It followed that move with a quarter-point rate cut in November. Those cuts lowered the central bank’s key rate to 4.6%, down from a four-decade high of 5.3%.

Though inflation is now well below its peak of 9.1% in June 2022, average prices are still about 20% higher than they were three years ago — a major source of public discontent that helped drive President-elect Donald Trump’s victory over Vice President Kamala Harris in November.

US economy seems to be holding steady

Typically, the Fed cuts rates to try to stimulate the economy enough to maximise employment yet not so much as to drive inflation high. But the US economy appears to be in solid shape. It grew at a brisk 2.8% annual pace in the July-September quarter, bolstered by healthy consumer spending. That has led some Wall Street analysts to suggest that the Fed doesn’t actually need to cut its key rate further.

But Powell has said that the central bank is seeking to “recalibrate” its rate to a lower setting, one more in line with tamer inflation.

One possible problem to the Fed’s efforts to keep inflation down is Trump’s threat to impose widespread tariffs on US imports – a move that economists say would be likely to send inflation higher. Trump said he could impose tariffs of 10% on all imports and 60% on goods from China. As a consequence, economists at Goldman Sachs have forecast that core inflation would amount to 2.7% by the end of 2025. Without tariffs, they estimate it would drop to 2.4%.

The euphoria from investors pushed Nasdaq beyond 20,000

Expectations for a series of cuts to rates by the Fed have been one of the main reasons the S&P 500 has set an all-time high 57 times this year, with the latest coming last week.

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And stocks received a new boost following the latest inflation data on Wednesday.

Big Tech stocks led the way, which drove the Nasdaq composite up 1.8% to top the 20,000 level for the first time. The Dow Jones Industrial Average, meanwhile, lagged behind, with a dip of 99 points, or 0.2% while the S&P 500 rose 0.8% to break its first two-day losing streak in nearly a month and finished just short of its all-time high.

One of the best performers was Tesla, it jumped 5.9% to finish above $420 (€399) at $424.77 (€404). It’s a level that Elon Musk made famous in a 2018 tweet when he said he had secured funding to take Tesla private at $420 per share.

In the bond market, the yield on the 10-year Treasury rose to 4.27% from 4.23% late Tuesday. The two-year Treasury yield, which more closely tracks expectations for the Fed, edged up to 4.15% from 4.14%.

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