Wall Street
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  • Fed now seen delivering 50 bps hike in September
  • U.S. consumer price growth slows in July
  • Musk sells Tesla shares worth $6.9 bln
  • Volatility index closes at four-month low

Wall Street lifted on Wednesday, placing the NASDAQ more than 20% over its June low, after U.S. inflation fell more than anticipated last month and lifted hopes the Federal Reserve will become less aggressive on interest rate increases.

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A steep drop in the cost of gasoline helped the U.S. Consumer Price Index remained flat in July after rising 1.3% in June, the Labor Department said. The CPI advanced by a lower-than-expected 8.5% over the last 12 months following a 9.1% increase in June.

The rebound came in the wake of the first significant sign of relief for Americans who have watched inflation continuously soar. The Nasdaq currently has climbed 20.8% since bottoming but still needs to top its previous peak in November to confirm a new bull market.

Fed funds futures traders are now pricing in only a 43.5% probability that the U.S. central bank lifts rates by 75 basis points when it convenes in September, in comparison to 68% prior to the data. A 50 basis point rise is seen as a 56.5% chance.

Shawn Snyder, head of investment strategy at Citi U.S. Wealth Management in New York, said:

“For the market, it’s sort of a Goldilocks scenario right now because you have the labor market holding up and inflation potentially starting to come down. That is what a soft landing would look like.”

But one month of falling inflation is not sufficient for the Fed to send a perfectly clear signal, Snyder said.

The rebound on Wall Street was far-reaching, with all 11 S&P 500 sectors increasing in a sea of green. Growth stocks (.IGX) climbed higher than value (.IVX), while small caps (.RUT), Dow transports (.DJT), and semiconductors (.SOX) also climbed.

The S&P 500 (.SPX) rose 87.77 points, or 2.13%, to 4,210.24, while the Dow Jones Industrial Average (.DJI) gained 535.1 points, or 1.63%, to 33,309.51, and the Nasdaq Composite (.IXIC) climbed 360.88 points, or 2.89%, to 12,854.81.

It was the largest single-day increase for both the S&P 500 and NASDAQ in two weeks, and for the Dow in three weeks. It was the strongest close for the S&P 500 since early May.

“(Inflation at) 8.5% is still very high, but there is optimism that perhaps June was the peak,” said Randy Frederick, vice president of trading and derivatives for Charles Schwab.

Producer prices data for last month on Thursday as well as this month’s unemployment and inflation data for publishing in September could change the course of the Fed again, Frederick said.

The Fed has raised its policy rate by 225 basis points since March despite concerns the rapid increase in borrowing costs could steer the U.S. economy into a recession.

The falling inflation was the first “positive” reading on price pressures since the Fed started tightening policy, Chicago Fed President Charles Evans said, even as he indicated he understands the Fed has a lot more work to do.

After a rocky start to the year, the benchmark S&P 500 is up almost 15% from mid-June lows, mainly on expectations the Fed will be less aggressive than expected in its efforts to offer a soft landing for the economy as it grapples to tame inflation.

However, the S&P 500 is 12% lower than its all-time high in January, having been in a bear market since then.

The CBOE Volatility index (.VIX), Wall Street’s fear gauge, dropped below the 20.00 level to close at a higher than a four-month low.

Megacap and high-growth technology stocks, whose valuations are exposed to growing bond yields, climbed as Treasury yields slid steeply across the board. Alphabet Inc (GOOGL.O), Apple Inc (AAPL.O), Microsoft Corp (MSFT.O), and Amazon.com Inc (AMZN.O) all gained more than 2% each.

Economy-sensitive banks (.SPXBK) advanced 2.7%, with Morgan Stanley (MS.N) and Goldman Sachs Group Inc (GS.N) rising about 3% each.

“Banks have underperformed and are now getting bid,” said Thomas Hayes, managing member of Great Hill Capital LLC, adding that investors are trailing laggards that have not taken part in the rebound since June lows.

Tesla Inc (TSLA.O) climbed 3.9% after Elon Musk sold shares worth $6.9 billion in the electric car maker to fund a potential deal for Twitter Inc (TWTR.N) if he does not win a legal battle with the social media platform. Twitter rose 3.7%.

Meta Platforms Inc (META.O) gained 5.8% after the Facebook parent said on Tuesday it had collected $10 billion in its first-ever bond offering.

Volume on U.S. exchanges was 11.33 billion shares, against the 10.98 billion average for the full session over the last 20 trading days.

Advancing issues outweighed declining ones on the NYSE by a 5.69-to-1 ratio; on NASDAQ, a 3.34-to-1 ratio favored advancers. The Nasdaq Composite posted 64 new highs and 54 new lows; the S&P 500 registered five new 52-week highs and 29 new lows.

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