Wall Street piled more gains Friday onto its mammoth rally from a day earlier to close out its best week since the summer.
The S&P 500 rose 0.9% a day after soaring 5.5% for its best day in more than two years. The Dow Jones Industrial Average added 32 points to its surge of more than 1,200 from a day earlier, while the Nasdaq composite jumped 1.9%.
Markets got a boost after China relaxed some of its strict anti-COVID measures, which have been hurting the world’s second-largest economy. Hopes for more growth from China helped not only stocks but also oil prices to rise, with U.S. crude gaining 2.9% to $88.96 per barrel.
The main reason for this week’s euphoria in markets was a report on Thursday showing inflation in the United States slowed by more than expected last month. That raised hopes the worst of inflation may have passed and the Federal Reserve can be less aggressive about raising interest rates to get it under control, though analysts cautioned high inflation could be slow to fall and some called Wall Street’s big rally overdone.
What the Fed does with rates is crucial for Wall Street because hikes slow the economy and can cause a recession, all while dragging down on stock prices. They’ve been the main reason for markets’ struggles this year.
Perhaps just as important as how bad inflation is at the moment is how high U.S. households see it being in future years. That’s because too-high expectations can trigger a vicious cycle where people accelerate purchases and make other moves that inflame inflation further.
The Fed has said preventing such a doom loop is one of the reasons it’s moved so aggressively on rate hikes. Inflation expectations are currently high relative to history, but a preliminary report on Friday suggested they’re not moving very much.
The median expectation for inflation in the coming year among households rose to 5.1% from 5% a month earlier, according to a survey by the University of Michigan. Expectations for long-run inflation, meanwhile, ticked up to 3%. But that’s still within the same 2.9% to 3.1% range where they’ve been for 15 of the last 16 months.
High inflation helped knock down the survey’s reading for overall consumer sentiment by more than economists expected.
“The consumer is laser-focused on inflation and they’re feeling it every day,” said Brian Price, head of investment management at Commonwealth Financial Network. “I wouldn’t expect that we see any upside with regard to consumer sentiment until inflation comes under control.”
The Fed has already lifted its key overnight interest rate to a range of 3.75% to 4%, up from basically zero in March. The likely scenario is still for it to hike further into next year, and then to hold rates at that high level for some time.
The hope for markets is that a softening in inflation could mean the Fed will hold the line at a lower, less painful level for investors than it would have otherwise.
“They’ve been pretty clear all along they were going to front-load the interest rate increases,” Price said. “They need some time to evaluate the data over the next few months.”
Traders are increasingly betting the federal funds rate could top out around a range of 4.75% to 5% by early next year, according to CME Group. A week ago, they saw a higher ultimate rate as more likely, with a sizable chunk expecting something like 5.25% to 5.50%.
Bond markets were closed for trading in observance of Veterans Day. On Thursday, yields plunged as investors pared back their expectations for how aggressively the Fed will raise rates.
The S&P 500 rose 36.56 points to 3,992.93, and its 5.9% gain for the week was its third in the last four and its biggest since June. The Dow rose 32.49, or 0.1%, to 33,747.86, and the Nasdaq climbed 209.18, or 1.9%, to 11.323.33. Both also notched hefty gains for the week.
The market has routinely reacted with exaggerated swings following each month’s inflation data report, according to Jonathan Golub, chief U.S. equity strategist at Credit Suisse. And while Thursday’s report “was clearly a big positive, the market’s response appears out of sync with the size of the surprise.”
Companies that do a lot of business in China and around the region were particularly strong Friday following the relaxation of anti-COVID restrictions. Wynn Resorts rose 8.3%, and Las Vegas Sands gained 5.5%.
In the crypto market, meanwhile, prices sank again amid the industry’s latest crisis of confidence. One of the bigger trading platforms, FTX, filed for bankruptcy protection after its users began scrambling to pull out their money on fears about its financial strength and after a bigger rival nixed a deal to buy the troubled company.
The exchange and its founder are under investigation by the Department of Justice and Securities and Exchange Commission, and rivals have said FTX’s failure could dent confidence in the broader industry.
Bitcoin fell below $16,800, down 6% from a day earlier, according to CoinDesk. It set its record of nearly $69,000 almost exactly a year ago, and it was above $21,000 a week ago.
Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.