Inflation Data Sparks Rally On Wall Street Amid Rate Cut Optimism

(RTTNews) - Following the lackluster performance seen in the previous session, stocks moved sharply higher over the course of the trading day on Tuesday. The major averages all showed strong moves to the upside after ending Monday's trading narrowly mixed.

The major averages saw continued strength going into the close, ending the day near their highs of the session. The Nasdaq soared 407.00 points or 2.4 percent to 17,187.61, the S&P 500 surged 90.04 points or 1.7 percent to 5,434.43 and the Dow jumped 408.63 points or 1.0 percent to 39,765.64.

The rally on Wall Street came following the release of a Labor Department report showing producer prices crept slightly higher in the month of July.

The Labor Department said its producer price index for final demand inched up by 0.1 percent in July after rising by 0.2 percent in June. The uptick by producer prices matched economist estimates.

Meanwhile, the report said the annual rate of producer price growth slowed to 2.2 percent in July from an upwardly revised 2.7 percent in June.

Economists had expected the annual rate of producer price growth to decelerate to 2.3 percent from the 2.6 percent originally reported for the previous month.

The notable slowdown by the annual rate of price growth increased confidence the Federal Reserve will lower interest rates at its monetary policy meeting next month.

CME Group's FedWatch Tool is currently indicating a 54.5 percent chance the Fed will cut rates by 50 basis points and a 45.5 percent chance of a 25 basis point rate cut.

"The PPI data this morning came in lower than expected - across the board - which is good news for those investors that worried the Fed would have to be more cautious in lowering interest rates due to lingering inflation," said Chris Zaccarelli, Chief Investment Officer, Independent Advisor Alliance.

He added, "If tomorrow's CPI report comes in lower than expected, like this morning's PPI report did, then the Fed truly has a green light to cut rates by 50 bps at their next meeting if they deem it necessary to quickly get back to neutral in the face of a looming slowdown in the economy."

On Wednesday, the Labor Department is scheduled to release its more closely watched report on consumer price inflation in the month of July.

Economists currently expect consumer prices to rise by 0.2 percent in July after edging down by 0.1 percent in June, while the annual rate of consumer price growth is expected to dip to 2.9 percent from 3.0 percent.

Core consumer prices, which exclude food and energy prices, are also expected to rise by 0.2 percent in July after inching up by 0.1 percent in June. The annual rate of core price growth is expected to slow to 3.2 percent from 3.3 percent.

Sector News

Semiconductor stocks turned in some of the market's best performances on the day, resulting in a 4.2 percent spike by the Philadelphia Semiconductor Index.

Substantial strength was also visible among computer hardware stocks, driving the NYSE Arca Computer Hardware Index up by 3.2 percent.

Housing stocks also showed a significant move to the upside, as reflected by the 1.7 percent gain posted by the Philadelphia Housing Sector Index.

Software, airline and pharmaceutical stocks also moved notably higher on the day, while energy stocks bucked the uptrend amid a sharp pullback by the price of crude oil.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region moved mostly higher during trading on Tuesday. Japan's Nikkei 225 Index soared by 3.5 percent, while China's Shanghai Composite Index rose by 0.3 percent.

The major European markets also moved to the upside over the course of the session. While the German DAX Index advanced by 0.5 percent, the French CAC 40 Index climbed by 0.4 percent and the U.K.'s FTSE 100 Index increased by 0.3 percent.

In the bond market, treasuries extended a recent move to the upside following the producer price inflation data. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, slid 5.7 basis points to 3.852 percent.

Looking Ahead

The Labor Department's report on consumer price inflation and its impact on the outlook for interest rates are likely to be the key drivers of trading on Wednesday.