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S&P 500 has its best day in 2 years on cooling inflation

New York Stock Exchange, Wall st, New York, USA

Stocks rally as investors think inflation has peaked.

The US stocks are having their best day since 2020 on better-than-expected inflation figures. Wall Street now thinks inflation might have peaked.

The S&P 500 jumped 5.54% or had its best day since April 2020.

The good news also flowed to the Dow Jones which is up 3.7% and the Nasdaq Composite which surged to its best day since March 2020, up 7.35% at the close.

The good news flowing from the US hit the world markets, with Australia's future market up 2.73% before the open.

In a tweet, economist Mohamed El-Erian said: "What a memorable day for markets with every asset – stocks, bonds, precious metals and, yes, even crypto – registering massive gains. To state the obvious, the CPI data triggered a strong technical that incentivised all types of investors to scramble for more immediate market exposure."

Why are share markets rallying?

Like most of 2022, today's market is simply an inflation story.

But for once the figures broke in our favour.

October's consumer price index rose by just 0.4% from the month and 7.7% from a year ago.

While these sound like large figures (and they are), it is actually the lowest annual increase since January.

It is also a slowdown from the 8.2% annual pace for the month prior.

Better still, the rate of inflation slowed below what experts were predicting. The rate of inflation was tipped to grow by 0.6% to 7.9%.

Core inflation (so, excluding volatile items like food and energy) increased by 0.3% or 6.3% annually.

Who were the bigger winners overnight?

This is probably unsurprising but the big tech names were amongst the big winners, although they are also the ones that have been experiencing the biggest falls.

The S&P 500's information tech sector leapt 8.3% to lead all 11 industrial groups higher, while energy fell 2.2%.

The likes of Amazon, Apple, Microsoft, Meta and Tesla were up at least 7%, with Amazon leading the way up 12.2%.

What could happen next?

The slower inflation rate could get the Federal Reserve (Fed) to pivot from its current rate hiking cycle.

The central bank has been lifting rates by 75 basis points over the last 4 meetings.

However, slowing inflation could provide an opportunity for the Fed to slow the rate of increases.

Well, that is at least what the market is saying.

Although, a 7.7% figure is still well above the Fed's 2–3% target range.

Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office, points out that inflation remains high.

"The Fed was adamant that it won't hit the brakes on rate hikes until inflation slows, and while the market's rally indicates investors may see light at the end of the tunnel, it will get one more reading before its decision next month," Loewengart said.

"Remember that even as we see a slowdown, prices remain elevated and have a long way to go before normalising."

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