CPI Fuels Fed Cut Bets & Pushes Wall Street Higher – US Market Wrap

Wall Street breathed a sigh of relief after a surprise slowdown in inflation sparked a stock rally and a drop in bond yields, supporting bets that the Federal Reserve will continue to cut interest rates this year.

Equities erased their losses for 2025, with the S&P 500 rising nearly 2%, its largest gain since the aftermath of the US election. A surge in Treasuries reduced 10-year yields by 15 basis points, alleviating concerns that a 5% rate was on the horizon. This year, the “fear gauge” of the market, the VIX, has fallen the most. A Goldman Sachs basket of money-losing tech companies rose 3.2%, while the most-shorted shares increased 3.8%. Bitcoin was trading near $100,000.

The US CPI rose less than expected in December, reinforcing expectations that the Fed will cut interest rates sooner than previously thought. Swap traders have returned to fully pricing in a rate cut by July. That was a quick shift after Friday’s strong job data sparked speculation that officials would only be able to resume policy easing in September or October. Not to mention some bets on hikes.

The S&P 500 increased by 1.8%. The Nasdaq 100 gained 2.3%. The Dow Jones Industrial Average rose 1.7%. A gauge of the “Magnificent Seven” megacaps rose 3.7%. The Russell 2000 gained 2%. The KBW Bank Index rose 4.1% as Citigroup, Goldman Sachs Group, Wells Fargo, and JPMorgan began the earnings season.

The yield on 10-year Treasuries fell 15 basis points, to 4.64%. The dollar dropped 0.2%. Even after Israel and Hamas agreed to a ceasefire, bringing the war in Gaza to an end for the time being, oil prices remained high.