The US inflation report for December triggered a strong market response as stocks climbed and bond yields tumbled. Investors welcomed signs of easing inflation, which fueled optimism about future Federal Reserve policy shifts. Major indices, including the S&P 500, Dow Jones Industrials, and Nasdaq 100, posted notable gains.
S&P 500 Surges as Core Inflation Slows
The S&P 500 Index (NYSEARCA:SPY) rose 1.50%, reaching a one-week high. Meanwhile, the Dow Jones Industrials (DJI) and Nasdaq 100 (NASDAQ:QQQ) gained 1.51% and 1.75%, respectively. Futures markets also responded positively, with March E-mini S&P 500 futures (ESH25) climbing 1.67%.
This bullish sentiment followed a Fed-friendly Consumer Price Index (CPI) report. Headline inflation rose 2.9% year-over-year in December, while core inflation, which excludes food and energy, eased to 3.2%—better than market expectations of 3.3%.
Lower Bond Yields Buoy Market Confidence
Bond yields fell sharply after the inflation report. The 10-year Treasury note yield dropped 13.9 basis points to 4.653%, while March 10-year T-note futures (ZNH25) surged. Reduced yields often lower borrowing costs, encouraging investment in growth sectors and homebuilding stocks.
Big Banks Drive Earnings Optimism
The earnings season began with upbeat results from major financial institutions.
Citigroup (NYSE:C) outperformed expectations, reporting $3.48 billion in fixed-income sales and trading revenue.
Goldman Sachs (NYSE:GS) led Dow Jones gainers with $13.87 billion in Q4 net revenue, surpassing consensus estimates.
Wells Fargo (NYSE:WFC) delivered stronger-than-expected net interest income of $11.84 billion.
Additional earnings highlights included positive surprises from BlackRock (NYSE:BLK) and Bank of New York Mellon (NYSE:BK).
Mortgage Applications Surge Amid Yield Declines
Mortgage activity saw a robust uptick, with applications rising 33.3% in early January. The refinancing index jumped 43.5%, reflecting borrowers’ eagerness to capitalize on falling rates. However, the 30-year fixed mortgage rate increased to 7.09%, marking an eight-month high.
Global Markets Show Mixed Reactions
European and Asian markets displayed varied performance. The Euro Stoxx 50 climbed 1.15%, while China’s Shanghai Composite and Japan’s Nikkei posted modest losses. European bonds mirrored US trends, with German bund and UK gilt yields both falling.
Key Earnings and Data to Watch
Investors now await the upcoming US retail sales report, a critical indicator of consumer spending trends. Analysts expect a 0.6% month-over-month rise for December. Bloomberg Intelligence forecasts 7.5% Q4 earnings growth for the S&P 500, making it the second-strongest quarter in recent years.
The US inflation report’s positive reception underscores its influence on Federal Reserve policy and market trajectories. Traders will closely monitor additional data and rate decisions in the weeks ahead.
Will Fed Rate Cuts Follow the Inflation Slowdown?
The prospect of future Federal Reserve rate cuts is now a key point of speculation. While the latest inflation report eased concerns, Fed officials remain cautious. The markets currently price a slim 3% chance of a 25-basis-point rate cut at the upcoming Federal Open Market Committee (FOMC) meeting. However, if inflation continues to cool, pressure may build for the Fed to shift from its aggressive tightening cycle.
Additionally, bond market trends will be pivotal. Lower yields reduce borrowing costs, directly impacting sectors like housing and consumer credit. Homebuilding stocks, including Lennar (NYSE:LEN) and D.R. Horton (NYSE:DHI), have already benefited from falling Treasury rates. If the Fed signals a dovish turn, these sectors could gain further momentum.
Globally, central banks are also reevaluating policies. In Europe, the unexpected easing of UK core inflation to 3.2% year-over-year has sparked conversations about potential Bank of England rate cuts. Similar dynamics are unfolding in the Eurozone, where softer industrial production data and dovish commentary from European Central Bank (ECB) leaders hint at potential rate reductions.
Finally, with earnings season in full swing, corporate results will shape investor sentiment. Strong performance in financials, technology, and consumer sectors could reinforce market optimism. However, weak results or cautious guidance may temper the rally. Investors should remain vigilant as macroeconomic data, corporate earnings, and policy announcements converge in the coming weeks.
Featured Image – Freepik
