U.S. Stocks Surge To Three-Month Highs On Tamer Than Expected Inflation Data

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With traders reacting positively to highly anticipated consumer price inflation data, stocks moved sharply higher during trading on Wednesday. The rally more than offset the weakness seen in the previous session, with the major averages reaching three-month closing highs.

The major averages all finished the day firmly in positive territory. The Dow jumped 535.10 points or 1.6 percent to 33,309.51, the Nasdaq spiked 360.88 points or 2.9 percent to 12,854.80 and the S&P 500 surged 87.77 points or 2.1 percent to 4,210.24.

The rally on Wall Street came after the Labor Department released a report showing U.S. consumer prices unexpectedly came in flat in the month of July.

The Labor Department said its consumer price index was unchanged in July after jumping by 1.3 percent in June. Economists had expected consumer prices to edge up by 0.2 percent.

Compared to the same month a year ago, consumer prices in July were up by 8.5 percent, reflecting a bigger than expected slowdown from the 9.1 percent spike in June.

The annual rate of price growth was expected to slow to 8.7 percent from the four-decade high seen in the previous month.

Meanwhile, the report said core consumer prices, which exclude food and energy prices, rose by 0.3 percent in July after climbing by 0.7 percent in June. Core prices were expected to increase by 0.5 percent.

The annual rate of core consumer price growth was unchanged at 5.9 percent, while economists had expected an acceleration to 6.1 percent.

The tamer than expected inflation data has led to speculation that the Federal Reserve will slow the pace of interest rate hikes at its September meeting.

CME Group's FedWatch tool is currently indicating a 56.5 percent chance of a 50 basis point rate hike and a 43.5 percent chance of a 75 basis point rate hike.

"Today's inflation report might lead the Fed to downshift the size of its rate hikes to 50bps in September," said Kathy Bostjancic, Chief U.S. Financial Economist at Oxford Economics.

She added, "However, we still see 75bps as likely given the ongoing inflation pressures, still elevated inflation readings, and ongoing tight labor market that is leading to large wage gains."

Sector News

Semiconductor stocks showed a substantial rebound after pulling back sharply in recent sessions, resulting in a 4.3 percent spike by the Philadelphia Semiconductor Index.

Considerable strength was also visible among computer hardware stocks, as reflected by the 4 percent surge by the NYSE Arca Computer Hardware Index. The index ended the session at its best closing level in two months.

Networking stocks also turned in a strong performance on the day, driving the NYSE Arca Networking Index up by 3.6 percent to a three-month closing high.

Housing, transportation and banking stocks also saw considerable strength, moving higher along with most of the other major sectors.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region moved mostly lower during trading on Wednesday. Japan's Nikkei 225 Index slid by 0.7 percent, while Hong Kong's Hang Seng Index plunged by 2 percent.

Meanwhile, the major European markets moved to the upside on the day. While the German DAX Index jumped by 1.2percent, the French CAC 40 Index climbed by 0.5 percent and the U.K.'s FTSE 100 Index rose by 0.3 percent.

In the bond market, treasuries gave back ground after an early rally but still closed modestly higher. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, edged down by 1.1 basis points to 2.786 percent after hitting a low of 2.674 percent.

Looking Ahead

Trading on Thursday may be impacted by reaction to a pair of Labor Department reports on weekly jobless claims and producer price inflation.

On the earnings front, entertainment giant Disney (DIS) is among the companies releasing their quarterly results after the close of today's trading.

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