Nasdaq rockets higher after US inflation miss

The tech-heavy Nasdaq 100 index soared 3-4% Tuesday, propelled higher by today’s miss in US inflation data, boosting investors’ confidence that the Fed will be done with rate hikes soon.

Inflation slows down; time for celebration

On Tuesday, the Bureau of Labor Statistics reported that the Consumer Price Index (CPI) for November indicated a 7.1% increase in prices over the previous year and a 0.1% increase from a month earlier. According to Bloomberg statistics, economists anticipated prices to increase by 7.3% annually and 0.3% monthly.

On a “core” basis, which excludes the volatile food and energy components of the report, prices rose 6.0% annually and 0.2% month-over-month. The consensus forecast for the core CPI was a 6.1% yearly increase and a 0.3% monthly increase.

“Another downside inflation surprise not only validates a Fed decision to slow the pace of rate hikes, but it also raises hopes that the inflation surge may actually be tamed within the next 12 months,” Seema Shah, chief global strategist at Principal Asset Management said in emailed comments.

As a result, many now anticipate that the Federal Reserve would raise its benchmark interest rate by 0.5% at this week’s meeting, which would be less than the 0.75% hikes it has implemented at each of its four most recent meetings.

Core inflation remains elevated

The Fed closely monitors “core” inflation, which provides policymakers with a more nuanced view of inputs such as housing. In contrast, the headline CPI statistic has fluctuated primarily in sync with volatile energy costs this year.

After an increase of 1.8% in October, the energy index decreased by 1.6% in November. The decline was partially caused by a 2% decline in the fuel category of the index after gas prices increased by 4% in October.

The housing category of the CPI, which accounts for 30% of total CPI and 40% of the core reading, was the leading contributor to the monthly all-items gain and more than offset losses in energy indices. According to the Bureau of Labor Statistics, the cost of shelter increased by 7.1% over the last year, accounting for over half of the entire rise in the core CPI.

Short-term seems bullish now

Having broken above the first significant resistance of previous highs near $12,140, the index has confirmed a bullish breakout, likely targeting the 200-day moving average (the blue line) near $12,470.

On the other hand, if the price fails to stay above $12,140, we might see some profit-taking, possibly dragging the Nasdaq back to the psychological level of $12,000.