The Nasdaq Composite (^IXIC 2.15%) jumped roughly 2% after new economic data showed easing inflation, a relief to investors that also led to a decline in Treasury yields. The Dow Jones Industrial Average (^DJI 1.73%) jumped over 600 points.
Shares of many artificial intelligence (AI) stocks moved higher on the news. Semiconductor company Micron Technology (MU +0.49%) traded 5.7% higher as of 12:12 p.m. ET. Meanwhile, AI software companies BigBear.ai (BBAI 5.42%) and C3.ai (AI 6.62%) traded nearly 5% and 3% higher, respectively.
The market breathes a sigh of relief
Stocks began to rally yesterday after numbers from December's Producer Price Index (PPI) report rose less than expected, suggesting that inflation is still trending downward. The big spotlight was on the Consumer Price Index (CPI) this morning, which didn't disappoint.
Consumer prices in December increased 0.4% from the prior month, slightly ahead of expectations. However, core CPI, stripping out more volatile food and gas prices, only rose 0.2%, slightly less than expectations, once again suggesting that price pressure could be starting to abate. The CPI rose 2.9% year over year, in line with expectations. The yield on the 10-year U.S. Treasury bond fell roughly 12 basis points to 4.67% after hitting high levels in recent weeks.
The report looks good because the bulk of the increase came from a 2.6% jump in energy prices, much higher than what has been experienced in past months. Meanwhile, shelter, which is the largest weighting in the CPI, continued to show improvement with prices easing.
"Today's CPI may help the Fed feel a little more dovish. It won't change expectations for a pause later this month, but it should curb some of the talk about the Fed potentially raising rates," Morgan Stanley Wealth Management's chief economic strategist Ellen Zentner told CNBC. "And judging by the market's initial response, investors appeared to feel a sense of relief after a few months of stickier inflation readings."
In other good news, the major banks reporting earnings this morning delivered strong results and showed an economy on solid footing. Traders betting on what the Federal Reserve will do with rates this year are still concerned about inflation, but the chances of more than one rate cut this year increased, although the majority still think there will only be one.
The economic landscape improved, but is not out of the woods yet
Today's inflation report paints a rosy picture. Inflation continues to trend in the right direction, the job market is strong, and yields may be elevated for the right reasons due to economic expansion, so it makes sense for investors to be buying the news today. Of course, the situation has been volatile, and I suspect it could remain that way in the near term. Inflation remains above the Fed's preferred 2% target, and one bad report could cast doubt on the belief that the country's central bank has conquered inflation.
I didn't see a ton of company-specific news today. BigBear.ai and C3.ai have tremendous potential, being positioned like miniature forms of Palantir Technologies. However, given that they aren't yet profitable and have risen substantially over the past few years, I would keep positions small until there is more clarity about their trajectory.
Micron is more of a buy. The company has a strong position in the memory chip market, which is critical in the AI ecosystem. The stock trades cheaper than many AI names, at less than 15 times forward earnings.
