Markets rally after October CPI print shows cooling prices

A weaker-than-expected inflation report last week triggered the biggest rally markets have seen in months.

Why it matters: The knee-jerk response to a single economic report — the Consumer Price Index report for October — shows that even after a horrible year, hope springs eternal among some investors.

• If inflation eases — they seem to think — it might mean the low interest rates that goosed markets over the last decade will return, and: Presto! Happy days are here again.
• The Fed's six rate hikes this year have pushed stocks down more than 20% at times in 2022. The S&P is still on track for its worst year since 2008.

What happened: Ricochet rally.

• On Thursday, the Nasdaq composite rose 7.4%, its biggest increase since March 24, 2020, just after the markets bottomed during the pandemic panic. It rose almost another 2% on Friday.
• The S&P rose 5.5% Thursday, its most since April 2020, and tacked on a 0.9% gain Friday.
• The S&P 500 (up 5.9%) had its biggest weekly rise since June. The Nasdaq (up 8.1%) jumped the most since March.

Details: The rally commenced with the release of the latest Consumer Price Index report on Thursday at 8:30am, which showed year-over-year inflation falling to 7.7% in October, from a rate of 8.2% in September.

• While that's high by the standards of recent decades, it wasn't as high as analysts and economists had expected.

What they're saying: "It’s not surprising because investors have been waiting for evidence that inflation is peaking," wrote Brian Price, head of investment management for Commonwealth Financial Network, an investment adviser, in a note. "I don't think we're out of the woods," he added.

What we're expecting: A flurry of wet-blanket statements to be forthcoming from the Fed, which will want to ensure that the animal spirits — which essentially work against its efforts to raise interest rates and tighten "financial conditions" — don't end up undoing some of its efforts.

• If growing investor appetite for riskier investment feeds through to the corporate bond market, it would lower the cost of borrowing and investing.
• That's the equivalent of stepping on the gas pedal, and fueling the economic engine — while the Fed has been trying to hit the brakes by raising rates.

The bottom line: This could be simply another bear market rally. But a big one.