What happened

Let the news go forth: Inflation is down (sort of), and Wall Street is very happy about that.

On Thursday, the U.S. Department of Labor announced that consumer price inflation in October was only 7.7%. This number was down from last month's, below analyst predictions and the "lowest annual increase since January" according to CNBC. These observations combined to kindle a broad stock market rally this morning. As of 10:45 a.m. ET, shares of streaming services provider and streaming ads provider Roku (ROKU -3.05%) were up 10.6%, while digital ad vendors PubMatic (PUBM 0.33%) and The Trade Desk (TTD -4.34%) were gaining 12.1% and 19.6%, respectively.  

So what

The Labor Department report couldn't have come at a better time (for advertising industry stocks). Just one day ago, The Trade Desk suffered an 8% sell-off after warning that fourth-quarter revenue might fall short of analyst expectations, and the evening before, rival PubMatic warned of an even steeper shortfall in its Q4 revenue -- costing PubMatic stock a 14% loss.  

Roku's Q4 guidance, by the way, arrived earlier this month, and in the words of one analyst, it was "frankly horrific" -- about 11% below Wall Street estimates.  

Today, all three stocks are bouncing back, with The Trade Desk recovering all of yesterday's losses and PubMatic getting close. Why is the inflation news being taken as good news for advertising stocks, though?

Basically, the answer goes like this: High inflation has been causing the Federal Reserve to raise interest rates in an effort to slow down the economy and depress spending. When spending slows, though, sellers have less incentive to advertise their goods and services. That sounds like it should be bad news for advertising stocks -- and indeed, judging from the guidance from Roku, PubMatic, and The Trade Desk this month, it is bad news for advertising stocks.

Now what

What has changed today? Well, the hope is that with inflation no longer as high as it was earlier in the year, the Federal Reserve might see less need to keep raising interest rates -- or at least raise them less steeply, and less frequently, than it's been doing for most of this year. Reuters now reports that traders are betting there's a 70% chance that the Fed will only raise rates by 50 basis points when in next meets in December, instead of by 75 basis points.  

This, in a nutshell, is what investors are betting on today: That inflation is slowing, that rate hikes will slow, and that the economy will therefore not slow as much as has been feared.

The problem with that thinking, though, is that even 7.7% inflation is still pretty high, and core inflation (which excludes volatile food and energy prices, and is therefore more likely to stick around even if food and gas prices get cheaper) is still very high at 6.3%. And the other problem is that, if the Fed concludes from today's inflation report that its policies of raising interest rates to lower inflation are working, it might very well keep doing what's working (i.e., keep raising interest rates).

As Roku, PubMatic, and The Trade Desk have already warned this month, that's not good news for their businesses. It might not be great news for their stock prices, either.