(Dec 19): Data showing US inflation cooled at a startling clip last month ignited stock and bond markets, bolstering bulls with prospects for more decisive Federal Reserve (Fed) rate cuts in 2026.
Despite the numerous caveats surrounding the data impacted by the government shutdown, traders welcomed the slowest increase in consumer prices since early 2021. But that was not all. A solid outlook from giant Micron Technology Inc underscored the voracious appetite for all things related to artificial intelligence (AI). The S&P 500 rose nearly 1%, halting a four-day slide.
Treasury yields dropped as the consumer price index (CPI) offered some relief to traders worried about more pronounced inflation that could keep a lid on Fed cuts.
“November’s inflation undershoot has armed Fed doves with strong ammunition,” said Seema Shah at Principal Asset Management. “Distortions can’t be ruled out, but the sharp drop in annual inflation leaves the Fed with little excuse not to respond to rising unemployment.”
Because of the shutdown, the Bureau of Labor Statistics couldn’t collect prices throughout October and started sampling later than usual in November. For policymakers, what the latest CPI means depends on how sceptical they are about its accuracy, said Jim Baird at Plante Moran Financial Advisors.
“On the surface, the news on inflation was good and may help to clear the path for further Fed easing. But enough questions will be raised to keep a January cut from being a slam dunk,” he noted.
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For its next policy decision in January, swaps are implying just about 20% odds of a cut. A reduction is fully priced in by mid-2026. Traders are also sticking with their call that the Fed lowers rates twice next year.
The Nasdaq 100 rose 1.5%. Micron soared 10%. In late hours, FedEx Corp boosted its profit forecast. Nike Inc posted a surprise jump in sales. The yield on 10-year Treasuries slid four basis points to 4.11%. The dollar wavered.
A busy day for global monetary policy decisions saw German and UK bonds underperforming US peers after the European Central Bank and Bank of England issued hawkish signals on the outlook for their rate paths.
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In a note titled “CPI + MU = Relief Today”, Steve Sosnick at Interactive Brokers referred to the impacts of inflation and Micron’s outlook on the stock-market rebound on Thursday.
“So much for the malaise of the past few days. A bad mood is no match for positive data, and we received positive news that allayed two key areas of concern,” he said.
In a report fouled by the record-long government shutdown, inflation in several categories that had long been stubborn seemed to nearly evaporate. The core CPI increased 2.6% in November from a year ago, trailing all estimates.
While the November CPI print is admittedly noisy, it offers hope to a different inflation narrative than "what we’ve seen over the past six months", said Bret Kenwell at eToro. "We would need to see further inflation data confirm this narrative change," he added.
“Although this is just one inflation reading — and admittedly not the Fed’s preferred inflation gauge — easing inflation concerns could open the door to a more accommodative Fed moving forward,” Kenwell said.
The latest inflation report vindicated the Fed’s dovish stance at its most recent meeting and could raise the likelihood of another rate cut in January, according to Stephen Kates at Bankrate Financial.
“The Fed said it was in ‘wait-and-see mode’, and today it got to see inflation moving in the right direction,” said Ellen Zentner at Morgan Stanley Wealth Management. “Inflation may still be above target, but today’s data made the opening for additional rate cuts just a little wider.”
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“We would advise market participants to look through the November report’s dovish signal, and wait for what’s likely to be more reliable December numbers,” said Oscar Munoz, Gennadiy Goldberg and Jayati Bharadwaj at TD Securities. “We think Fed officials will probably aim to do the same.”
Scrutiny on the details of this week’s CPI report is justified, but it did provide marginal information that inflation is directionally moving in the right direction, according to Jason Pride at Glenmede.
“Since the Fed is balancing competing concerns around inflation and the health of the jobs market, any incremental data pointing to softening price trends could help justify more and/or sooner rate cuts,” he said. “The December CPI report due next month now takes on a bit more importance.”
The latest inflation reading won’t move the needle for the Fed given how noisy the data is, according to Kay Haigh at Goldman Sachs Asset Management. The Fed will instead focus on the December CPI as a more accurate bellwether for inflation, he said.
“We may have some more hot readings as demand ticks higher from larger than expected tax returns in early 2026, but we should expect inflation to cool in the latter part of next year,” said Jeff Roach at LPL Financial.
There is clearly room for the Fed to keep cutting rates in order to support the labour market and if the doves win out, then we are likely to see stock prices supported — and move higher, according to Chris Zaccarelli at Northlight Asset Management.
“While next year will undoubtedly bring new challenges, heading into the end of the year, there should be room for the market to move higher as corporate profits are increasing, gross domestic product is growing and inflation for now remains in check,” he said.
The surprisingly subdued inflation reading should put additional rate cuts back on the Fed’s radar for 2026, according to Jennifer Timmerman at Wells Fargo Investment Institute.
“Our take is that underlying inflation remains better behaved than we anticipated in late 2025, though we believe several more months of data — beyond the distorted government shutdown period — will be needed to confirm what is a remarkable improvement,” she said.
“Inflation has lost its grip — and the Fed knows it,” said Gina Bolvin at Bolvin Wealth Management Group. “Today’s CPI print gives the market what it needed: confirmation that disinflation is durable and policy relief is coming.”
For investors, Bolvin says this is the time to lean into growth with guardrails: “be selective, be strategic, and stay ahead of the curve.”
US stocks are heading into 2026 with positive momentum and a host of bullish forecasts at their backs. For the fourth year of strong gains that many predict to play out, they must still overcome plenty of potential threats.
For a start, valuations are already rich and the group of stocks leading the gains is relatively narrow, a risky setup in itself. A lot is riding on AI winners proving that, rather than forming a bubble, they have further to climb.
About 57% of participants in a Deutsche Bank survey said a potential plunge in AI valuations poses the biggest risk to market stability in 2026.
Blackstone Inc chief executive officer Steve Schwarzman brushed aside talk of a bubble surrounding the data centers powering AI, saying the business is conservative.
In a CNBC interview on Thursday, Schwarzman cast Blackstone’s role as one of a straightforward service provider to healthy businesses. The company builds data centres and signs long-term leases with credit-worthy partners like Nvidia Corp, he said.
“This is not bubble-type work,” Schwarzman said. “This is extremely conservative.”
Uploaded by Isabelle Francis
