S&P 500 closes on 2-month high as investors bet on cooling inflation

Shares bounce ahead of the Fed’s latest minutes on monetary policy.

Once again, 2022 is the story of inflation.

But this time, shares are rallying on predictions the worst could be behind us.

This led to stocks overnight closing at a 2-month high.

Overall, the S&P 500 rose 1.36% to close above 4,000 points for the first time since last September.

Meanwhile, the Dow Jones is up 1.18% and the tech-heavy Nasdaq Composite gained 1.36%.

The good news is expected to flow through to the Asian markets, which are currently trading up prior to open.

One of the experts predicting falling inflation is Morgan Stanley’s chief US equity strategist Mike Wilson who says the US economy will see a “pretty steep decline in inflation.”

“We don’t think it’s the 70s, we think it’s more of the 40s, where it’s a boom-bust,” Wilson told CNBC on Tuesday.

He went on to compare it with the current cycle to the demand-driven inflation economies experienced post-World War II.

Will the Fed slow its rate hiking cycle?

The key driving force of what will happen next is the Federal Reserve (the Fed) and whether it needs to continue to raise rates.

Currently, the Fed is in one of its fastest rate hike cycles in its recent history. The central bank has lifted the federal funds rate by 75 basis points to 3.75–4% during its November 2022 meeting.

This was the sixth consecutive rate hike and the fourth straight three-quarter point increase.

Rates are now at their highest point in almost a generation of investors, back to 2008 levels.

But investors are now anticipating the rate of change will slow.

Cleveland Fed President Loretta Mester said that lowering inflation remains critical and supported a smaller rate hike in December.

It was a similar story out of Kansas.

Kansas City President Esther George pointed out that inflationary pressures could be cooling as a “calmer” labour market comes out.

The market will be looking for clues out of comments made by St. Louis Fed Reserve President James Bullard as well as the Fed’s minutes from the Fed’s November meeting scheduled to be released tomorrow.