Wall Street hails ‘first really meaningful beat’ on inflation

U.S. stocks advanced on Tuesday as investors mulled whether latest data showing prices rose less than forecast last month would prompt the Federal Reserve to alter its aggressive approach to battling inflation.

The S&P 500 and the Nasdaq 100 capped a volatile session with a gain after data indicated the worst of inflation has likely passed. Fed Chair Jerome Powell’s closely watched measure of services prices that excludes energy and rents also continued to moderate.

The soft consumer price index data was briefly celebrated with a surge in equities, but the indexes pared those gains as investors turned their focus to what the latest numbers mean for the Fed’s path of rates.

While the Fed is largely expected to raise rates by half a percentage point Wednesday, investors will be watching what officials say for further policy clues. Swap markets are now favoring a quarter-point hike as early as the Fed’s February meeting.

Still, some investors are cautious about overstating the latest CPI print.

“Investors aren’t seeing the handwriting on the wall that the Fed is going to stay higher for longer,” said Jason Katz, managing director and private wealth adviser at UBS on Bloomberg Television. “If they cut rates in the latter part of next year, that’s going to be because they broke things along the way and things are ugly. So it’s our view that the terminal rate lands anywhere between 5%-5.25% and remains there for the full calendar year.”

Meanwhile, Treasuries surged, with the policy-sensitive two-year yield dropping as much as 24 basis points. The greenback halted a two-day rally.

Following the Fed, the European Central Bank will announce its rate decision Thursday. Markets will also contend with decisions from the Bank of England and monetary authorities in Mexico, Norway, the Philippines, Switzerland and Taiwan.