US stocks rally as inflation cools and euro holds four-month highs

Wall Street cheered a sharper-than-expected slowdown in US inflation, sending stocks higher and bolstering expectations for Federal Reserve rate cuts later this year.  

The latest inflation report offered a fresh sign that price growth in the US economy is cooling.  

In February, the Consumer Price Index (CPI) rose 2.8% from a year earlier, easing from 3% in January and below the 2.9% economists had forecast. The core CPI, which strips out volatile food and energy costs, also slowed to 3.1% from 3.3%. 

On a month-over-month basis, both the headline and core measures increased 0.2%, marking a sharp deceleration from the previous month’s 0.5% and 0.4% readings, respectively. The decline was driven by falling energy and transportation costs, with gasoline prices dropping 1% and airline fares plunging 4%. 

Robin Brooks, senior fellow at the Brookings Institution and former chief economist at the Institute of International Finance, said the inflation data was "good," but cautioned against overinterpreting one report.  

"Today's February print is flattered by a bunch of one-offs, while the January print was way above the pace of underlying inflation. Once you filter all that noise out, core CPI is running around 0.25% m/m and is clearly slowing." 

Still, some analysts see risks ahead. Rogier Quaedvlieg, senior economist at ABN Amro, said that “disinflation in goods that are heavily exposed to tariffs, such as cars and apparel, has stalled," raising concerns about upside risks in future inflation readings. Bank of America echoed this caution, noting that if core goods inflation persists at 0.2% month-over-month, "it will be challenging for inflation to hit the 2% target”. 

Fed meeting in focus

The Federal Reserve is set to announce its latest monetary policy decision next week, with markets widely expecting the central bank to hold interest rates steady. However, investors will closely watch new economic projections for GDP growth, inflation, and unemployment, which could provide clues on when rate cuts might begin. 

Traders are currently pricing in a 78% chance of a rate cut in June, according to the CME Group’s FedWatch Tool. The latest inflation numbers strengthen the case for easing, but the Fed is likely to remain cautious, especially given lingering risks in key categories like services inflation. 

Markets rally on cooling inflation

US stocks ended a two-day losing streak, with major indexes climbing after the inflation data reassured investors. The S&P 500 advanced 0.7%, while the tech-heavy Nasdaq 100 surged 1.5%.  

Major gainers within Wall Street mega-cap stocks included Tesla, up 7.7%, Nvidia, up 6.7%, and Oracle, up 4.2%. Each of the Magnificent Seven stocks – with the sole exclusion of Apple (down 1.4%) – recorded a gain for the session.  

European stock indices closed higher on Wednesday. The STOXX 50 index rose 0.6%, led by strong gains in banking and industrial stocks. Italy’s FTSE Mib outperformed, jumping 2% as lenders rallied. 

Among individual stocks, Unicredit and BBVA rose 3.4% and 3%, respectively, while Safran gained 5.1%, making it one of the top performers in the STOXX 50. 

On the corporate front, Swiss pharmaceutical giant Roche climbed 3.9% after securing rights to an obesity therapy from Zealand Pharma, whose shares soared 38% on the $5.3 billion (€4.87 billion) deal. Meanwhile, Spanish retail giant Inditex slumped 7.8% after reporting a sluggish start to its fiscal year.  

Puma tumbled nearly 20% after issuing a weak sales outlook for the first quarter, while Porsche shares slid 3% as the carmaker warned of potential earnings headwinds due to restructuring costs and trade-related uncertainties. 

Euro steadies at four-month high

In currency markets, the euro held steady at $1.0910, maintaining its highest level since November 2023.  

The single currency has surged more than 5% this month, on track for its best performance in over a year, as investors positively viewed Germany’s fiscal efforts. 

Geopolitical risks easing, yet trade concerns linger

Beyond inflation and interest rates, investors are also navigating geopolitical risks.  

Market sentiment was lifted by optimism over a potential ceasefire in Ukraine, after Kyiv signalled its willingness to accept a US-brokered peace proposal. Meanwhile, Washington has resumed military aid and intelligence-sharing with Ukraine, adding to hopes of de-escalation. 

However, trade tensions remain a concern. US President Donald Trump’s stance on tariffs continues to cast uncertainty over markets, with the US imposing 25% tariffs on all steel and aluminium imports. Retaliation from major trading partners, including the European Union, could weigh on global trade flows and corporate earnings in the months ahead.