Wall Street rallies again ahead of inflation report

Stocks soared again on Monday as Wall Street took its final steps ahead of a high-stakes report that investors hope will show inflation hit the economy less hard last month.

The Standard & Poor’s 500 index rose 43.05, or 1.1%, to 4,110.41 for its fourth consecutive gain. It is his longest winning streak since July, at the start of the market’s rebound from his blows earlier in the year.

The Dow Jones industrial average gained 229.63, or 0.7%, to 32,381.34, and the Nasdaq composite rose 154.10, or 1.3%, to 12,266.41.

The country’s extremely high inflation and the measures taken The Federal Reserve takes to fight it, have been driving Wall Street all year. Economists expect a report on Tuesday to show consumer prices were 8.1% higher in August than a year earlier, but inflation was not as bad as the rate 8.5% from July.

A slowdown would bolster hopes that inflation peaked at 9.1% in June and is now coming down. This, in turn, could allow the Fed to avoid the worst-case scenario for the markets in which it would drive short-term interest rates up to recession-provoking levels and keep them there for an extended period.

“This week is going to be very revealing,” said James Demmert, founder and managing partner of Main Street Research.

Beyond Tuesday’s headline consumer inflation report, a report on Wednesday is expected to show that wholesale inflation slowed last month. A report the following day will show how US households have shifted their spending amid high inflation, while a report on Friday will show how much inflation households are bracing for in the years to come.

These are all crucial data points for the Fed as it considers the extent of the interest rate hike at its meeting next week. Fed officials recently loudly reaffirmed their intention to raise rates enough to slow the economy, as well as their commitment to keep rates high long enough to ensure that the job gets done on inflation.

But with Tuesday’s report possibly continuing a trend, many investors and economists are hoping inflation could quickly return to more “normal” levels, unlike the 1970s, when it took many years.

Jonathan Golub, chief US equity strategist at Credit Suisse, wrote in a report that investors and economists expect inflation to plummet in the next 12 to 18 months.

Markets are fairly confident that the Fed will raise its main short-term interest rate by 0.75 percentage points next week for the third meeting in a row. But the hope is that a slowdown in inflation will allow the Fed to successfully navigate the narrow path of a “soft landing” for the economy.

This is when higher rates slow the economy enough to stop inflation, but not so much as to cause a major recession. Higher rates hurt the economy by making it more expensive to buy a house, a car or anything else bought on credit. They also drive down the prices of stocks, bonds, and other investments.

Many traders expect the Fed to begin tapering the size of its rate hikes after next week through the end of the year, before potentially holding rates steady through the first half of 2023.

Of course, such hopes could also lead to disappointment on Wall Street. The economy has already given the wrong impression on inflation, with the hope that a peak has passed to start accelerating again.

Demmert said the broader market expects inflation to not only peak, but to begin to cool significantly. He said the high hopes raised by Tuesday’s inflation report “likely won’t be healthy for equities.”

Wall Street economists are still divided on whether the US economy will slide into recession next year due to higher interest rates and other factors.

The Fed has raised short-term rates four times this year, and its aggressive moves have helped the value of the US dollar soar against many other foreign currencies.

A strong dollar helps limit inflation in the country by lowering the prices of raw materials and imports, but it can also hurt the profits of American companies that make many sales abroad. The dollar gave up some of its gains on Monday after slipping against the euro, sterling and several others.

Treasury returns were mixed. The 10-year Treasury yield, which helps control the direction mortgages and other lending rates are heading, is back at 3.34%, near its highest level in more than a decade.

The two-year yield, which tends to track Fed action expectations, was flat at 3.56%. It remains close to its highest level since before the 2008 financial crisis.

On the stock market, the vast majority of stocks rebounded. Energy producers were near the top of the rankings, benefiting from higher oil prices.

Bristol-Myers Squibb gained 3.1% for one of the largest gains in the S&P 500 after federal regulators approved its treatment for adults with moderate to severe plaque psoriasis.

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