Stocks bounce back to end higher as inflation data dents hopes for big Fed rate cut

Wall Street reversed an earlier sell-off to close higher on Wednesday, and Brent crude prices rebounded from 3-1/2 year lows, as a key inflation report cemented expectations that the U.S. Federal Reserve will issue a 25-basis point rate cut next week.
Investors also parsed Tuesday night’s U.S. Presidential debate to gauge potential policy shifts after the November election.
All three major U.S. stock indexes pulled a U-turn, transforming a sell-off into a rally by mid-afternoon. Tech stocks, particularly chips, were clear outperformers, putting the Nasdaq ahead of the pack.
The Canadian benchmark stock index largely followed along, building steady gains from late-morning on, and all key sectors ended with gains.
The Labor Department’s Consumer Price Index showed the annual inflation rate CPI shed 0.4 percentage points to a cooler-than-expected 2.5%. The core measure – which excludes food and energy – posted a hotter-than-expected monthly gain of 0.3%, and an annual increase of 3.2%.
“The inflation report kind of gave inflation bears a little something and it gave inflation bulls something,” said Chuck Carlson, chief executive officer at Horizon Investment Services in Hammond, Indiana.
“At least initially today, there was the feeling that a 50-basis-point rate cut isn’t going happen,” Carlson added. “Maybe now investors are starting to think that maybe that isn’t a bad thing.”
Financial markets Wednesday baked in an 85% probability that the Fed will cut its key policy rate by 25 basis points at next week’s policy meeting, with a dwindling 15% chance of a double-sized 50 bp cut, according to CME’s FedWatch Tool.
Market participants paid close attention to late Tuesday’s U.S. presidential debate. Their exchanges left investors with few new details on issues that could sway markets, including tariffs, taxes and regulation. But online prediction markets showed bets on a stronger likelihood of a Kamala Harris win in November: Harris’ odds in PredictIt’s 2024 presidential general election market improved to 55 cents from 53 cents before the debate, while Donald Trump’s odds slipped to 47 cents from 52 cents.
Shares of Trump Media & Technology Group, the company that owns Truth Social, fell more than 10%, while other so-called Trump trades such as bitcoin and crypto stocks retreated. Solar stocks, seen as benefiting from a Democrat win, rallied and health-care shares fell.
“The US Presidential debate achieved its goal by providing a decisive edge to one of the candidates in what has been an exceptionally close race,” said Charu Chanana, Head of FX Strategy and Global Market Strategist at Saxo. “Crypto and energy stocks might face headwinds as market sentiment adjusts to the shifting political dynamics.”
Trump has positioned himself as a pro-cryptocurrency candidate. Bitcoin was about flat on the day after slipping nearly 4%, while shares of some cryptocurrency-focused companies including crypto miner Riot Platforms also fell.
Shares in operators of correctional facilities, including GEO Group and CoreCivic, viewed as likely to benefit from tougher immigration policies, also slipped.
At the same time, U.S.-listed shares of solar companies, seen as benefiting from a Harris win, rose. The Invesco Solar ETF, down about 25% for the year, jumped 6% on Wednesday.
Health insurer stocks including Humana and CVS Health were also down on Wednesday. Some analysts believe Harris’ push to lower drug prices may weigh on the sector.
The Dow Jones Industrial Average rose 124.75 points, or 0.31%, to 40,861.71, the S&P 500 gained 58.6 points, or 1.07%, to 5,554.12 and the Nasdaq Composite added 369.65 points, or 2.17%, to 17,395.53.
Yields on 10-year U.S. Treasury notes steadied from an earlier slump in which the benchmark rate touched its lowest level since June 2, 2023. Benchmark U.S. 10-year notes in late trading was yielding 3.6609%, from 3.644% late on Tuesday.
The Toronto Stock Exchange’s S&P/TSX composite index ended up 208.08 points, or 0.9%, at 23,211.17, its highest closing level since Aug. 29.
Gains were led by a 3.7% rise in consumer discretionary stocks as Dollarama Inc. beat second-quarter profit estimates. Shares of the retail chain company jumped 8.2%.
Technology also stood out, rising 1.6%, while energy snapped a 7-day losing streak as the price of oil settled 2.4% higher at US$67.31 a barrel.
Uranium mining shares climbed, with Denison Mines Corp up 5.9% and Cameco adding 5.7% as Russian President Vladimir Putin said that Moscow should consider limiting exports of uranium, titanium and nickel in retaliation for Western sanctions.
Around 100 business groups on Wednesday urged Ottawa to prevent a strike by Air Canada pilots, saying a stoppage would disrupt supply chains and spoil Canada’s reputation as a reliable partner. The airline’s shares were up 1.9%.
Reuters, Globe staff