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S&P 500, Nasdaq build on biggest stock rally since 2020

U.S. stocks extended this week’s dramatic ascent on Friday after deceleration in CPI inflation data ignited the most intense rally on Wall Street since early 2020.

The S&P 500 (^GSPC) rose 0.9%, notching its biggest winning week since June, while the technology-heavy Nasdaq Composite (^IXIC) gained 1.9%. The Dow Jones Industrial Average (^DJI) closed up modestly higher, up 0.1%, lagging behind the other indexes.

All three major averages skyrocketed Thursday, each recording their largest one-day advances since a rebound from the throes of the COVID crash more than two years ago. Outsized moves were catalyzed by lighter October consumer price data that fueled bets the Federal Reserve may halt the tightening of financial conditions as soon as early next year. The S&P 500, Dow, and Nasdaq soared 5.5%, 3.7% — or 1,200 points — and 7.4%, respectively.

On Thursday, Treasury yields and the U.S. dollar index posted their steepest one-day decline since the Global Financial Crisis more than a decade ago. The bond market was closed for Veteran’s Day on Friday.

A reversal in China’s Zero-COVID policy to reduce the amount of time in quarantine travelers to the country spend buoyed sentiment in early trading. Oil markets advanced as traders speculated the move may stoke a boost to commodity demand, with West Texas Intermediate (WTI) futures bouncing nearly 3% to above $88 per barrel.

Meanwhile on the economic data front, the University of Michigan’s preliminary reading on its consumer sentiment survey for November fell to 54.7 from. 59.9 in October, the lowest since July.

“Overall, the report suggests that peak inflation may finally be behind us, though inflation may remain elevated for a while,” BNY Mellon Investment Management Head of U.S. Macro Sonia Meskin said of the CPI report in a note Thursday.

She noted that the figure supports the smaller 0.50% rate increase for December telegraphed at this month’s FOMC meeting, which investors are pricing in.

“However, it is also important to not over-emphasize one report for inflation and policy trajectory,” she added.

The Consumer Price Index (CPI) in October rose at an annual 7.7% and increased 0.4% over the month. On a “core” basis, which strips out the volatile food and energy components of the report, prices rose at a clip of 6.3% year-over-year and 0.3% on a monthly basis.

Federal Reserve Board Chairman Jerome Powell speaks during a news conference following a Federal Open Market Committee meeting, at the Federal Reserve Board Building in Washington, DC, on November 2, 2022. - The Federal Reserve delivered another steep interest rate increase on Wednesday, as expected, with its move to cool red-hot inflation taking on more weight amid the political maelstrom ahead of key US midterm elections. The latest three-quarter percentage point increase takes the benchmark lending rate to 3.75-4.0 percent, the highest since January 2008. (Photo by Mandel NGAN / AFP) (Photo by MANDEL NGAN/AFP via Getty Images)

Federal Reserve Board Chairman Jerome Powell speaks during a news conference following a Federal Open Market Committee meeting on November 2, 2022. (Photo by MANDEL NGAN/AFP via Getty Images)

Despite the moderation, many strategists assert that excitement is premature, with Federal Reserve officials still poised to tighten further after Chair Jerome Powell said last month that policymakers still have “some ways to go” on restoring price stability — a message that his central bank colleagues have since also echoed in a series of public speeches.

“The Fed’s extreme data dependence combined with the fact that economic data will only show the real-time labor market and inflation slowdown with a lag, increases the odds of an overtightening accident,” Gregory Daco, EY Parthenon chief economist, said in emailed comments.

Meanwhile, Nicholas Colas of DataTrek points out another reality: Although inflation trends lower once it peaks and starts to decline – as seen in 1970, 1974, 1980, 1990, 2001, and 2008 – that downshift typically comes with recessions, and there are no exceptions to the rule.

Turmoil persisted in cryptoworld as the FTX debacle unravels and the company announced Friday morning that it was filing for bankruptcy. Fallen crypto hero billionaire Sam Bankman-Fried has also stepped down as CEO and is reported to be under investigation by the U.S. Securities and Exchange Commission as his exchange seeks a cash bailout. Bitcoin traded around $16,500 Friday afternoon.

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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