Key Points:

• Stocks Skyrocket in Best Post-CPI Day on Record
• Nasdaq 100 jumps 7.5% in biggest daily gain since March 2020
• Yields plunge, dollar gauge tumbles most in more than decade

Stocks surged in a buy-everything relief rally after slower-than-projected price growth spurred bets the Federal Reserve can downshift its aggressive rate-hike path.

The S&P 500 climbed 5.5% for the best first-day reaction to a CPI report since at least 2003 when records began. About 96% of stocks in the benchmark were in the green, the broadest advance since Oct. 4, according to Bloomberg data. The rally caught short-sellers wrong-footed, helping spur the outsized gains. Crypto markets stabilized despite the turmoil surrounding crypto exchange FTX.

Headline inflation came in at 7.7%, the lowest since January, before Russia’s war in Ukraine pushed up commodity prices. More important for the Fed, the core measure that excludes food and energy slowed more than anticipated.

Thursday’s intense rally only partially clawed back steep losses this year for risk assets hammered by Fed’s tightening. The S&P 500 is still down 17% in 2022 and the Nasdaq 100 is off nearly 30%, with both headed for their worst years since 2008.

Treasuries soared, sending the rate on two-year notes, more sensitive to monetary policy, down 25 basis points. Rates traders downgraded the odds of another three-quarter-point rate increase in December almost to nil, while continuing to price in a half-point hike. The Bloomberg dollar index sank 2%.

Fed officials appeared to back a downshift in rate hikes after a stretch of four jumbo-sized increases. They also stressed the need for policy to remain tight. 

Dallas Fed President Lorie Logan said it may soon be appropriate to slow the pace to better assess economic conditions. San Francisco’s Mary Daly said the moderation was “good news,” but noted “pausing is not the discussion, the discussion is stepping down.” 

Swaps markets pulled back bets on a peak rate to slightly less than 4.9% in the first half of next year, from more than 5% before the CPI data.