NEW YORK (AP) — Wall Street rumbled Wednesday after inflation fell more than expected last month, fueling speculation that the Federal Reserve may not need to raise interest rates as aggressively as feared.

The S&P 500 rose 1.9% amid a broad rally that began after a report showed the nation’s biggest economic problem, inflation, slowed to 8.5% at the consumer level last month from 9.1% in June . Tech stocks, cryptocurrencies and other investments that have been hit the hardest this year were among the biggest gainers of the day.

The Nasdaq composite, whose many high-growth and expensive-looking stocks have been particularly vulnerable to interest rates, rose a market-leading 2.5%. Bitcoin rose 3.3% to $24,000, while the Dow Jones industrial average rose 469 points, or 1.4%, to 33,244 as of 1:34 p.m. ET.

Much of the slowdown in inflation in July was due to lower gasoline and oil prices. But even after ignoring that and volatile food prices, so-called “core inflation” held steady last month instead of accelerating as economists had predicted.

The data prompted traders to cut bets on how much the Fed will raise interest rates at its next meeting. According to CME Group, they now see a half percentage point increase as the most likely outcome. A day earlier, they had bet on a more aggressive hike of 0.75 percentage points, as in the last two hikes.

Such differences may seem small, but interest rates help determine where prices in financial markets go. And higher rates tend to lower prices for everything from stocks to commodities to crypto.

Bond prices soared immediately after the inflation report came out, driving down their yields. The yield on the two-year Treasury note, which tends to meet the Fed’s expectations, fell to 3.14% from 3.27% late Tuesday.

The yield on the 10-year note fell more slowly, falling to 2.76% from 2.78%, narrowing just below the yield on the two-year. Many investors see such a gap as a fairly reliable signal of an impending recession.

Concerns about a recession have intensified as the highest inflation in 40 years grips households and corporations around the world. The Fed and other central banks have raised rates to slow the economy in hopes of stopping inflation, but they risk choking it if they act too aggressively.

“They’re trying to take a very hard line here,” said Brian Nick, Nuveen’s chief investment strategist.

To be sure, inflation is still very high and is expected to remain so for some time to come. But Wednesday’s data nonetheless rejuvenated Wall Street, which was reeling after a stronger-than-expected jobs report on Friday that raised expectations for a more aggressive Fed. That bolstered hopes that peak inflation — and thus the Federal Reserve’s most aggressive rate hike yet — could be on the horizon.

“This is a step in the right direction, but keep in mind that we have many miles to go before inflation normalizes,” said Mike Lowengart, managing director of E-Trade Investment Strategy at Morgan Stanley.

The Federal Reserve will have several more long-awaited reports before its next interest rate announcement on September 21, which could also change its stance. These include reports showing economy-wide hiring trends due on September 2nd, with the next consumer inflation data due on September 13th.

This week’s reports will show how wholesale inflation is faring and whether US households are lowering their expectations of future inflation, a powerful data point for Fed officials.

Inflation data on Wednesday, however, helped stocks across Europe edge up slightly, while Asian markets, which closed earlier, were mostly lower. Germany’s DAX returned 1.2%, Japan’s Nikkei 225 fell 0.6% and Hong Kong’s Hang Seng lost 2%.

On Wall Street, companies in the housing industry had high hopes that a less aggressive Fed could mean less pressure on mortgage rates. Homebuilder DR Horton rose 4.7%, PulteGroup rose 4.5% and Lennar rose 3.8%.

Cruise lines and other travel-related businesses have also made big strides. Carnival rose 10.3% and American Airlines rose 4.2%.

Shares of Netflix, which was previously a high performer and the worst performer in the S&P 500 this year, rose 5.2%, although it remains down nearly 60% in 2022.


AP Business Writer Joe McDonald contributed.

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