US close: Stocks post huge rally as inflation falls more than predicted

US stocks surged from the off and held on to impressive gains by the close after a bigger-than-expected drop in inflation reignited hopes that the Federal Reserve will refrain from hiking interest rates again this cycle.

Many Fed policymakers – including chair Jerome Powell – had made comments in the past week indicating that they wouldn't hesitate to hike rates again if inflation didn't start coming down towards the 2% target.

So Tuesday's downside surprise came as welcome relief to the market, driving the S&P 500 and Nasdaq's best daily performances since April. Stocks were also helped by a tumble in bond yields with the US 10-year Treasury yield dropping 18.1 basis points to 4.455%.

The Dow Jones Industrial Average finished 1.4% higher, while the S&P 500 jumped 1.9% and the Nasdaq rose 2.4%.

All eyes on inflation data

According to the Department of Labor, the consumer price index (CPI) held steady on a seasonally adjusted basis in October, contrary to an expected 0.1% increase and down from 0.4% growth in September. That decreased the year-on-year inflation rate from 3.7% to 3.2% in October - slightly below the consensus forecast of 3.3%.

Notably, the closely watched measure of core annual inflation, which excludes food and energy prices, eased to 4.0% in October, surprising analysts who had pencilled in an unchanged reading from September of 4.1%.

“Falling prices at the pump were largely responsible for today’s cooler-than-expected US inflation numbers, which gives credence to the narrative that peak rates have truly been reached," said Danni Hewson, head of financial analysis at AJ Bell.

“Markets on both sides of the Atlantic rallied as expectation mounted that America’s fight against rising prices is pretty much over, and despite a few bumpy patches the landing strip ahead looks about as soft as anyone could have hoped for."

IG senior market analyst Axel Rudolph said that market expectations for the first rate cut by the Fed were brought forward to May 2024 following the inflation figures. “Analysts now anticipat[e] to see four rate cuts before the end of next year and rates to come back down to 4.25% to 4.5%," he said.

Looking ahead to Wednesday's economic data schedule, the New York manufacturing index will be released, along with US retail sales, the producer price index and business inventories.

Home Depot impresses

Home Depot was the first of the major retailers to release results this earnings season, and impressed with better-than-expected third-quarter profits. The share price rose over 5% despite the home-improvement chain reporting a 3% sales decline and guiding to 3-4% drop for the full year.

Snapchat shares surged on reports that the social media company had entered into a partnership with Amazon to allow in-app purchases from the e-commerce group.

Beauty Health's market cap dropped over 60% after the skincare reported a worse-than-expected third-quarter loss and delivered full-year revenue guidance short of analysts' estimates.