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Global stock markets soared and bond yields plunged on Tuesday as cooler-than-expected U.S. inflation data boosted expectations that the Federal Reserve was done raising interest rates and was on the path to cutting them next year.

The S&P 500 closed up 1.9%, its best day since April, with the rate-sensitive real estate and utilities sectors posting their biggest daily percentage gains since November 2022. The TSX gained 1.6% to a near eight-week high in a broad-based advance that also was led by the real estate and utilities sectors.

In the 12 months through October, the consumer price index climbed 3.2% after rising 3.7% in September. Economists were expecting a 3.3% gain. Core prices, which exclude the volatile food and energy components, rose 4.0% compared with economists’ estimate of a 4.1% increase. Consumer prices were unchanged on a monthly basis, the first such reading in more than a year.

“It’s telling us that the Fed is done, there’s nothing left for it to do here,” said Thomas Hayes, chairman at hedge fund Great Hill Capital at New York. “This is what the Fed was looking for, slowing inflation, slowing labour market and the economy’s holding up at the same time.”

Following the data, traders erased bets the Fed will raise borrowing costs any further and piled into bets on rate cuts starting by May. They are currently pricing in a 100% chance the Fed will hold rates next month, as per CME Group’s Fedwatch tool. U.S. rate futures priced in a more than 60% chance of a rate cut by the Fed in May next year.

Bond yields were down sharply across the curve. By late afternoon, both the U.S. two-year and 10-year bonds were down about 20 basis points, or one-fifth of a percentage point. The moves in Canadian bond yields, which take much of their direction from the U.S. treasury market, was a little less dramatic but were still large for a single day. The Canada five-year bond was yielding 3.804% by late afternoon, down 15 basis points, while the 10-year bond had retreated back to the lows of this past September.

Money markets also continue to increase bets that monetary easing is coming next year to Canada, where the economy has recently been more sluggish than in the U.S. and has been seeing similar downward trends in inflation. Implied probabilities in the swaps market on Tuesday showed just over a 50% chance of a quarter-point rate cut in the Bank of Canada’s overnight rate by April, with 75 basis points of cuts expected by the end of next year.

“You can say goodbye to the rate hiking era,” said Brian Jacobsen, chief economist at Annex Wealth Management, in the wake of the CPI report. “If the Powell Pause began in July, we’ll have to see how long he can hold rates here. In the soft landing of 1994-1995, the pause only last five months.”

Tuesday’s report from the Labor Department showed that prices either fell or rose more slowly across a broad range of goods and services, including gas, new and used cars, hotel rooms and housing. Gas prices fell 5 per cent from September to October and are down 5.3 per cent from a year earlier. They have continued to fall into November, suggesting that cheaper energy could hold down inflation this month as well.

The benign U.S. inflation report is bolstering the view that the Federal Reserve can bring down consumer prices without hurting the economy, a so-called Goldilocks environment that investors believe will support stocks and bonds.

Both asset classes have ripped higher in November following a months-long wobble, fueled by hopes that the Fed was unlikely to deliver any more of the rate increases that have spurred volatility throughout markets since early last year.

At the same time, there have been few indications that tighter monetary policy is severely hurting the economy in the U.S., supporting the view that prices can cool further without damaging growth.

“The broader market has been challenged with this consensus negative view about both a recession and inflation,” said Eric Kuby, chief investment officer at North Star Investment Management Corp. “Reality is telling a different story. This does feel like a Goldilocks moment for the entire market.”

Tuesday’s data offered more support for investors who had already been growing more optimistic about the market. Fund managers turned overweight equities in November for the first time since April 2022, according to the BofA survey. They also reported the third-largest overweight in bonds in the past two decades, according to the survey, as cash levels dropped to 4.7% from 5.3%.

The jump in stock prices was accompanied by a wave of bullish bets in the U.S. equity options markets, as traders ramped up wagers on more gains and threw in the towel on bearish positions. Call options, which benefit from rising prices, outnumbered bearish puts by their biggest margin in four months, with 1.44 call options projected to trade for every put contract by the end of the day, according to Trade Alert data.

Nevertheless, some investors were still wary about inflationary trends.

Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management, said in a note that she expected inflation data “to provide less of a tailwind for markets” in the coming months, as “forecasters don’t expect much further progress in the remainder of this year.”

Meanwhile, Fed Chair Jerome Powell warned last week that central bank officials were “not confident” that interest rates were yet high enough to finish the battle with inflation.

Jamie Cox, managing partner for Harris Financial Group, said the CPI data confirmed “what everyone already knew - inflation is on the decline in a meaningful way.”

“The question now for the Fed is whether they continue to believe that slowing the economy into recession is needed to completely conquer inflation,” Cox said. “I certainly hope not.”

The Toronto Stock Exchange’s S&P/TSX composite index ended up 314.58 points, or 1.6%, at 20,023.73, its fourth straight day of gains and its highest closing level since Sept. 20.

The prospect of interest rates staying “higher for longer is being challenged,” said Matt Skipp, president of SW8 Asset Management, adding that such a rethink could benefit the Toronto market because of its high sensitivity to interest rates.

The financials, utilities and real estate sectors, which have a combined weighting on the TSX of more than one third, are particularly sensitive to the rate outlook. Financials added 2.2%, utilities rose nearly 3% and real estate ended 4.4% higher.

The materials sector, which includes precious and base metals miners and fertilizer companies, was another standout, advancing 2.7% as gold and copper prices rallied.

A Glencore-led consortium sealed one of the mining sector’s biggest deals in years, agreeing to buy Teck Resources’ steelmaking coal unit for $9 billion. Shares of Teck Resources ended down 0.3%.

Sun Life Financial Inc shares rose 3.8% after the insurer reported quarterly earnings that beat analysts’ estimates.

On Wall Street, the Dow Jones Industrial Average rallied 489 points, or 1.4%, while the Nasdaq composite charged 2.4% higher. More than 90% of the stocks in the S&P 500 climbed.

Technology and other high-growth stocks tend to get some of the biggest boosts from easier rates, and a 2.3% rise for Amazon and 2.1% lift for Nvidia were two of the strongest forces pushing the S&P 500 upward.

Stocks of smaller companies also got a huge boost, with the Russell 2000 index of small stocks surging 5.4% for its best day in a year. Smaller companies are often seen as more dependent on borrowing cash to grow, which can make them more vulnerable to higher interest rates.

Globe staff, Reuters, The Associated Press

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