Wall Street rally lifts Nasdaq 20% from low as inflation fears ebb

NEW YORK, Aug 10 (Reuters) – Wall Street surged on Wednesday, putting the Nasdaq more than 20% above its June low, after U.S. inflation slowed more than expected in July and raised hopes the Federal Reserve will become less aggressive on interest rates hikes.

A sharp drop in the cost of gasoline helped the U.S. Consumer Price Index stay flat last month after advancing 1.3% in June, the Labor Department said. The CPI rose by a less-than-expected 8.5% over the past 12 months after a 9.1% rise in June. read more

The rally came in the wake of the first notable sign of relief for Americans who have watched inflation steadily climb. The Nasdaq now is up 20.8% since bottoming but still needs to pass its prior peak in November to confirm a new bull market.

Fed funds futures traders are now pricing in only a 43.5% chance that the U.S. central bank hikes rates by 75 basis points when it meets in September, compared with 68% before the data. A 50 basis point hike is seen as a 56.5% probability. read more

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

But one month of slowing inflation is not enough for the Fed to send an all-clear signal, Snyder said.

The rally on Wall Street was broad-based, with all 11 S&P 500 sectors rising in a sea of green. Growth stocks (.IGX) rose more than value (.IVX), while Dow transports (.DJT), small caps (.RUT) and semiconductors (.SOX) also rose.

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

It was the biggest single-day gain for both the Nasdaq and S&P 500 in two weeks, and for the Dow in three weeks. It was the highest 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 July on Thursday along with August inflation and employment data for release next month could alter the course of the Fed again, Frederick said.

The Fed has hiked its policy rate by 225 basis points since March despite fears the sharp rise in borrowing costs could tip the U.S. economy into a recession.

The slowing of inflation was the first “positive” reading on price pressures since the Fed began tightening policy, Chicago Fed President Charles Evans said, even as he signaled he believes the Fed has plenty more work to do. read more

After a rough start to the year, the benchmark S&P…