NEW YORK (AP) — U.S. stocks rose sharply on Wednesday after encouraging U.S. inflation data. Strong earnings reports from Wells Fargo and other big U.S. banks also helped the index post its best performance in two months.
The S&P 500 rose 1.8%. The Dow Jones Industrial Average rose 703 points, or 1.7%, and the Nasdaq Composite rose 2.5%.
Treasury yields also retreated in the bond market following the latest news that U.S. households will have to pay more for eggs, gas, housing and other living expenses in December. The report said headline inflation accelerated to 2.9% from 2.7% in November.
While no one wants inflation to rise, the numbers beneath the surface are more encouraging. Ignoring food and energy prices, which can fluctuate widely from month to month, underlying inflation trend slowed to 3.2% in December. Economists had expected growth to remain at 3.3% for a fourth consecutive month, according to FactSet.
The Fed is focusing more on this underlying number rather than the headline number, which is particularly welcome amid concerns that improvement in inflation has stalled and that it will be difficult to fall all the way to the Fed's 2% target.
Few traders expected Wednesday's data to convince the Federal Reserve to cut key interest rates when it meets later this month, the third consecutive meeting since September. But if more data shows that upward pressure on inflation is waning, that could open the door to a rate cut later this year or even in March, economists and analysts said.
"Perhaps the key takeaway is that markets are likely to get rattled over the next few data releases as investors look for a narrative that will make them feel comfortable for a few days," said Seema Shah, chief global strategist. Main asset Management.
Stocks on Wall Street have been swinging up and down for weeks as traders abandoned forecasts for a 2025 Federal Reserve interest rate adjustment. Further easing of policy will boost the U.S. economy and investment prices, but it may also give more impetus to inflation.
Traders were excited about the possibility of a series of rate cuts last year, when they pushed stocks to dozens of record highs, but have recently tempered their expectations. The Fed itself has said it may cut interest rates only twice this year instead of the four previously expected, and some traders have even considered the possibility of future rate hikes.
The latest news on Wednesday quelled speculation about a near-term rate hike, with Treasury yields retreating in the bond market on growing hopes of future rate cuts. The 10-year Treasury yield fell back from 4.79% to 4.65% on Tuesday night, which is a pretty big move. The index has been rising sharply since September, when it fell below 3.65%.
The two-year Treasury yield, which more closely tracks expectations for imminent Fed action, fell to 4.26% from 4.37%.
On Wall Street, gains were led by bank stocks, with several reporting profits for the final three months of 2024 that were stronger than analysts expected.
Wells Fargo rose 6.7%, Citigroup gained 6.5% and Goldman Sachs gained 6%. They're one of the first major U.S. companies to report year-end 2024 results, and they're likely to attract more attention than usual.
When Treasury yields climb and bonds pay more in interest, investors shift from stocks to bonds, adding pressure on stock prices. To make up for this loss, stock prices typically either have to fall or corporate profits have to grow more strongly.
Stocks of companies that stand to gain hugely from low interest rates have also moved to the forefront of the market.
For example, Builders FirstSource, a supplier of countertops and other building materials, gained 4.7%. The company and other housing-related companies will benefit from easier mortgage rates.
All told, the S&P 500 gained 107.00 points to 5,949.91. The Dow Jones Industrial Average rose 703.27 points to 43,221.55, and the Nasdaq Composite rose 466.84 points to 19,511.23.
Encouraging U.S. inflation data also eased pressure on global bond markets, boosting overseas stock indexes.
London's FTSE 100 rose 1.2%. UK markets have been under pressure as bond yields surged amid worries about a sluggish economy and national finances.
The French index also rose 0.7% and the German index rose 1.5%. Asian stocks were weaker, with trading in the region closed ahead of U.S. inflation data.
South Korea's Kospi was little changed after law enforcement officials detained President Yun Seok-yeol on Wednesday for impeachment over his failed declaration of martial law last month.
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Associated Press writer Zhong Zimo contributed.