Stocks Stage Comeback as CPI Fuels Treasury Gains: Markets Wrap

(Bloomberg) — 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 rate cuts in 2026.

Despite the caveats surrounding the data impacted by the government shutdown, traders welcomed the slowest rise in consumer prices since early 2021. The S&P 500 climbed 1%, with Micron Technology Inc. giving a solid outlook amid the artificial-intelligence boom while 24 top AI companies joined the US AI “Genesis Mission.”

Treasury yields dropped as the latest data offered some relief to traders worried about more pronounced inflation that could keep a lid on Fed rate cuts.

The core consumer price index, which excludes the often-volatile food and energy categories, increased 2.6% in November from a year ago. The overall CPI climbed 2.7% in November from a year ago.

“November’s inflation undershoot has armed Fed doves with strong ammunition for a January rate cut,” 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.”

While there’s more relevant data to come before the January meeting, this week’s numbers tilt the balance firmly toward the doves, Shah said. She stills expect two cuts in 2026, but says today’s CPI print raises the odds they’ll land in the first half of the year rather than the second.

For its next policy decision in January, swaps are implying an about 22% chance of a cut — slightly higher than before the release. A reduction is fully priced in by mid-2026. Traders are also sticking with their call that the Fed makes two reductions next year.

“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.”

The S&P 500 halted a four-day slide. A gauge of megacaps jumped 2.4%. Micron soared 13%. The yield on 10-year Treasuries slid three basis points to 4.12%. 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.

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 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.

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.

“There will be plenty of economic data to evaluate between now and then, but another cooler-than-expected inflation reading would suggest that the Federal Reserve may already be ahead of its inflation targets for 2026,” he said.

For policymakers, what the latest CPI report means depends on how skeptical they are about its accuracy, according to Jim Baird at Plante Moran Financial Advisors.

“The December data on jobs and inflation will weigh heavily into their calculus, but the one-two punch of rising unemployment and weaker inflation in the November data increases the likelihood that Fed policymakers may not be done trimming yet,” he noted.

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.

Overall, he notes we may get some “bumpy inflation readings” in the next few months, but his year-end forecast for inflation is 2.5%, giving the Fed opportunity to cut rates a few times next year.

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’d 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.

There is clearly room for the Fed to keep cutting rates in order to support the labor 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, the GDP is growing and inflation for now remains in check,” he said.

“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.”

The strategists noted that the dollar reaction was moderated by shutdown noise and questions around data calculation.

“Risk-reward in this environment would favor waiting for USD bounces or rallies to sell into,” they noted.

“We continue to believe that the Fed will cut rates at least twice next year irrespective of the new Fed chair,” said Scott Helfstein at Global X. “The numbers this morning helped support the Fed narrative that the risks to the job market were rising faster than the risks to inflation.”

The steady downtrend in shelter costs is starting to bring down core inflation, and this is good news for the Fed because shelter is the biggest category in overall inflation, according to David Russell at TradeStation.

“The disinflationary trend may continue this month because oil has dropped and home prices are still under pressure. This is a relief for people worried about a hawkish start to the year,” he said. “A Santa Rally could still be in the cards.”

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. More than a quarter warn of potential market turmoil from a new Fed chair pushing for aggressive rate cuts.

President Donald Trump looked to reassure Americans concerned about the rising cost of living during a prime-time address late Wednesday. Trump also said he’ll “soon announce our next chairman of the Federal Reserve, someone who believes in lower interest rates, by a lot.”

Blackstone Inc. Chief Executive Officer Steve Schwarzman brushed aside talk of a bubble surrounding the data centers powering artificial intelligence, saying the business is conservative.

In a CNBC interview Thursday, Schwarzman cast Blackstone’s role as one of a straightforward service provider to healthy businesses. The company builds data centers 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.”

The latest bout of volatility in US equity markets highlights a risk that strategists at JPMorgan Chase & Co. have been warning about: “extreme crowding” in stocks that have rallied hard this year.

“These companies are more sensitive to shocks, leaving them at risk of sudden repricing,” wrote Bram Kaplan, JPMorgan’s head of Americas equity derivatives strategy. “Low Vol stocks possess a more attractive risk-reward profile” he added, compared to the more volatile stocks, many of which are “second order speculative AI plays.”

Corporate Highlights:

Micron Technology Inc., the largest US maker of computer memory chips, gave an upbeat forecast for the current quarter, a sign that surging demand and supply shortages are allowing the company to charge more for products. Apple Inc. is making changes to its iOS software in Japan to comply with a new local law aimed at fostering competition, part of broader efforts by the iPhone maker to adapt to regulations around the world. Trump Media & Technology Group Corp., the company behind Truth Social, is getting into nuclear fusion. The company said Thursday it will merge with TAE Technologies Inc., a closely held fusion developer founded in 1998, in a transaction valued at more than $6 billion. Darden Restaurants Inc. raised its comparable sales forecast following better-than-expected growth at its Olive Garden and LongHorn chains. CarMax Inc. said it will tolerate lower margins and boost ad spending to repair its business and attract buyers after slumping sales wiped out half of the used car retailer’s market value this year. Activist investor Elliott Investment Management has built a stake of more than $1 billion in Lululemon Athletica Inc., according to a person familiar with the matter, as the struggling retailer faces a strategic overhaul amid its chief executive officer’s exit. Sterling Anderson, the executive leading General Motors Co.’s technology push, is emerging as the front-runner to eventually succeed Chief Executive Officer Mary Barra when the 63-year-old retires from the storied automaker. Oil major Chevron Corp. is preparing to export 1 million barrels of crude from Venezuela, a day after President Donald Trump accused the nation of using oil proceeds to finance drug trafficking and terrorism. Coinbase Global Inc. has announced its entry into prediction markets and equities trading. The biggest crypto exchange in the US said it’s starting to roll out both services, which will be made available to all eligible users in the US in the coming weeks. Intercontinental Exchange Inc., owner of the New York Stock Exchange, is in talks to invest in crypto payments firm MoonPay Inc. as part of a funding round, people familiar with the matter said. Digital bank operator SoFi Technologies Inc. has launched its own US dollar stablecoin, joining a growing list of financial firms betting on what is seen as a critical component of the digital asset economy. Pershing Square Holdings Ltd. said it will invest as much as $1 billion in Howard Hughes Holdings Inc. to back its purchase of specialty insurer Vantage Group Holdings Ltd. Jeff Bezos’ Blue Origin delayed the launch of a crew of six on a suborbital joyride Thursday, citing an unspecified issue after earlier delays for high winds. BP Plc appointed Meg O’Neill as chief executive officer, replacing Murray Auchincloss after just two years in the job as the oil giant struggles to revive its fortunes following a botched pivot toward renewables. Birkenstock Holding Plc predicted a slower pace of sales growth in the coming year as its sandals and clogs contend with the impact of a weaker US dollar and tariffs. UBS Group AG is set to begin its latest wave of job cuts in mid-January, according to people familiar with the matter. S&P Global Ratings upgraded Renault SA to investment grade, citing its expectation that the French manufacturer can sustain its recovery even in the midst of challenges for the European car sector. China Vanke Co. urged holders of a bond it’s trying to delay paying to give it more time for negotiations, with only four days until a grace period ends that could trigger a once-unthinkable default. What Bloomberg Strategists say…

“With core CPI easing to the slowest pace since 2021, a disinflation narrative that favors earlier rate cuts by the Federal Reserve is back in place after months of tariff-related angst about inflation. That’s supportive of equities’ year-end rally but only modestly helpful to bonds given global central bank tightening.”

—Edward Harrison, Macro Strategist, Markets Live. For the full analysis, click here.

Some of the main moves in markets:

Stocks

The S&P 500 rose 1.1% as of 1:58 p.m. New York time The Nasdaq 100 rose 1.9% The Dow Jones Industrial Average rose 0.4% The MSCI World Index rose 0.9% Bloomberg Magnificent 7 Total Return Index rose 2.4% The Russell 2000 Index rose 1% Micron rose 13% Currencies

The Bloomberg Dollar Spot Index was little changed The euro fell 0.2% to $1.1720 The British pound was little changed at $1.3383 The Japanese yen was little changed at 155.64 per dollar Cryptocurrencies

Bitcoin was little changed at $85,942.14 Ether rose 0.3% to $2,827.21 Bonds

The yield on 10-year Treasuries declined three basis points to 4.12% Germany’s 10-year yield declined one basis point to 2.85% Britain’s 10-year yield was little changed at 4.48% The yield on 2-year Treasuries declined one basis point to 3.47% The yield on 30-year Treasuries declined three basis points to 4.80% Commodities

West Texas Intermediate crude rose 0.6% to $56.29 a barrel Spot gold fell 0.2% to $4,330.74 an ounce –With assistance from Lu Wang.

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