Treasury yields fell sharply and eased their grip on the stock market Thursday, helping fuel the monster rally that broke out after a report of cooler-than-expected inflation data. The rise in yields this year has choked off stock market gains and weighed on technology and growth stocks in particular. They are high-priced stocks that do better when money is cheap. Tech led the market higher Thursday with a jump of 8.3%. Ark Innovation ETF , a poster child for growth, jumped 14.5% and had its best day ever. The consumer price index rose 0.4% in October, well below the 0.6% expected by economists, according to Dow Jones. Stocks had their best day since the post-pandemic rally in 2020. The benchmark 10-year Treasury note yield fell below 4% Thursday and stood at 3.83% in afternoon trading after touching a high of 4.32% just a few weeks ago. “The interest rate story is the big one. If it’s pricing in the possibility that the Fed is close to the end of the tightening cycle, that would be positive for stocks,” said Ed Clissold, chief market strategist at Ned Davis Research. “The risk is, of course, that ultimately this ends up in a hard landing … 25% or 30% of the time the Fed has pulled off a soft landing, but this is a trickier one than normal. But that doesn’t mean you can’t get a year-end rally.” Little more to go The rate move was huge but may not have that much more to go. John Briggs, head of strategy at NatWest Markets, said he could see the 10-year yield dip to 3.6% “You’ve got upside risk from the Fed,” he said. “Tell me what the next jobs and inflation numbers are going to be. The rates move is more than I expected, compared to others.” In the futures market, traders were betting Thursday that the Fed would raise its fed funds futures rate to 4.88% before stopping next spring. Ahead of the 8:30 a.m. ET CPI report, fed funds futures were priced for an end point for the Fed of 5.05%. The Dow Jones Industrial Average surged more than 1,200 points, and the S & P 500 jumped 5.5% to 3,956. The Nasdaq was the standout, rising 7.4% to 11,114. Small caps also gained, with the Russell 2000 climbing 6.1%. Clissold said there’s a risk the Fed goes too far with its tightening policy, while inflation is cooling. That could push the economy into recession. But first seasonal factors are at work, when the stock market typically moves higher in the fourth quarter of midterm election years. “I think 4,200 on the S & P 500 is pretty good to consider for this year,” Clissold said. “That’s kind of where the market hit resistance before. It had been support before and it broke down. Now, if we can get above the August highs, that would imply the rally could last into 2023. If this soft landing scenario plays out, the lows are likely behind us.” Clissold favors small caps as a play during the rally, since they are domestically focused. He also likes energy, health care and materials. Of the tech companies, he said “that would not be the first place we would look,” adding it is still expensive. Less dollar drag Rising yields and the strong dollar have been two trends that investors have been watching as the Federal Reserve normalized policy this year. But now there are signs the strong dollar may not be such a drag. The dollar’s gains have dampened some earnings growth because of the effect of currency translation and the pressure on foreign sales for multinationals. The dollar index was down 2.5%, its worst day since 2009 but it is still up 12.4% year to date. Marc Chandler, chief market strategist at Bannockburn Global Forex, said the dollar’s rise may be ending, and that it’s been peaking against the British pound and Canadian dollar. He said the positioning of traders in the euro currently shows them holding the biggest speculative long positions in futures contracts since the middle of last year. “The dollar is carving out a big top. … I don’t think people are really appreciating how historically overvalued the dollar is,” said Chandler. “The euro and yen are about 45% undervalued. This is going to take a while to correct. …The strong dollar has been a headwind for earnings, and it will probably become a tail wind. A year from now we’ll be talking about a weaker dollar being a benefit to earnings.” Jonathan Golub, chief U.S. equities strategist at Credit Suisse, said the markets may just be overreacting to the CPI. “The market is extrapolating that the Fed is going to have to do less. If you got that in isolation, it’s a reasonable assumption, but if you put it in a mosaic with the labor market and earnings and everything else, I’m not sure the market should have given us a [5.5%] jump today. It’s not a new world here.”
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