Stocks, bonds rise after U.S. price pressures ease

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U.S. stocks and bonds rose after data on Wednesday showed potential price pressures easing more than expected in the world's largest economy, prompting investors to bet on faster rate cuts this year.

Data from the U.S. Bureau of Labor Statistics showed that overall annual inflation rose to 2.9% in December from 2.7% in November, in line with expectations.

But excluding volatile food and energy costs, core inflation unexpectedly fell to 3.2% from 3.3% a month ago.

U.S. stocks and Treasuries rose after the data. Markets have fallen in recent weeks as investors lowered expectations for a rate cut from the Federal Reserve in anticipation that President-elect Donald Trump's economic policies will lead to inflation.

Seema Shah, chief global strategist at Principal Asset Management, said, “Today's consumer price index should boost markets and ease concerns that the United States is at the beginning of a second wave of inflation.”

Stocks and government bonds rose sharply following Wednesday's inflation data.

The S&P 500 was up 1.7% at lunchtime, while the tech-heavy Nasdaq Composite was up 2.3%. Stocks rose after Trump won the US presidential election, posting their best day since November 6.

The policy-sensitive two-year Treasury yield, which closely tracks interest rate expectations, fell 0.1 percentage point to 4.27%, while the 10-year Treasury yield, a benchmark for global borrowing costs, fell 0.13 percentage point to 4.66%. As prices rise, output falls.

The dollar fell 0.2% against six currencies.

As of Wednesday morning, investors were betting the Fed would cut interest rates for the first time this year by 25 basis points in July, compared with September before the data was released.

Fed officials have said they plan to take a “cautious approach” to cutting interest rates amid concerns that inflation may not fall soon to the central bank's 2% target.

Mark Cabana, head of U.S. rates strategy at Bank of America, said the inflation data, especially the core number, could provide a “modest boost” to the Fed's “confidence that inflation will continue to decline.” But he added that policymakers were likely “generally still frustrated by the slowdown in progress on inflation.”

Most investors and analysts believe the Fed will not cut interest rates again at its next policy meeting later this month. The president of the U.S. central bank said in his forecast that they would only cut interest rates by a further 50 basis points this year.

Trump, who took office on Monday, laid out an aggressive plan to impose tariffs on a wide range of imported goods, launch a massive crackdown on undocumented immigrants and implement sweeping tax cuts.

Economists warn that such plans could further push up inflation.

“The real question mark for inflation this year is not the economic impact on inflation or what the trends were before the Trump administration,” said David Kelly, chief global strategist at J.P. Morgan Asset Management. “Tariffs, immigration and fiscal policy What does the new policy mean for inflation?