The recent surge in U.S. stocks can be attributed primarily to the latest inflation data released, which aligned with market expectationsThis development has led to speculations that the Federal Reserve might reconsider its previously hawkish stanceReports indicated that the annual inflation rate for December 2024 edged up to 2.9%, a slight increase from November's 2.7%, but exactly meeting market anticipationsThe increase in year-end inflation can largely be traced back to a low comparative base from the previous year, significantly impacted by energy prices, particularly the costs of gasoline, heating oil, and natural gas

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Comparing the levels of these petroleum products between the end of 2023 and the end of 2024 reveals minimal variation, which partially explains the uptick in inflation.

Excluding the volatile food and energy categories, the core inflation rate for December stood at 3.2%, lower than the previous three months and beneath the market forecast of 3.3%. This surprising outcome has raised optimism among investorsHousing costs, a significant component of core inflation, had continued to rise but saw a slowdown in December, with growth tapering to 4.6%, the smallest increase since January 2022. Month-over-month, the core consumer price index increased by 0.2%, shy of November’s 0.3% and the expected 0.3%.

The disappointing inflation figures have reignited market hopes for substantial interest rate cuts by the Federal Reserve in 2025. The current market expectation indicates a higher probability of two to three rate cuts in 2025, potentially lowering rates to levels ranging from 3.75% to 4.00% or even as low as 3.25% to 3.50%. This contrasts sharply with the sentiment just a week prior, when speculation leaned towards a single rate cut within the year, reducing rates from the current 4.25% to 4.00% to 4.25%.

As expectations for rate cuts grow, the market sentiment reflects an increasingly optimistic economic outlookWith the prospect of lower interest rates, funding costs decrease, encouraging investors to take on more risk and consequently driving up equitiesThis logic underpins the recent uptick in U.S. stock prices.

Interestingly, this rally in U.S. stocks is not solely dominated by tech giants like Tesla and Nvidia; the banking sector has also shown remarkable performance

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Major banks reported quarterly earnings that surpassed expectationsJPMorgan Chase, America’s largest commercial bank by assets, saw its stock rise by 1.97%, closing at $252.35, translating to a market capitalization of $710.5 billionThe bank recently announced quarterly and annual results that exceeded forecasts and mentioned it held around $35 billion in "excess funds," which management indicated would be used to meet or potentially increase regulatory requirementsHowever, Wall Street anticipates that the bank may opt to repurchase sharesGoldman Sachs reported that net income for the December quarter surged more than double to $4.11 billion, resulting in a stock price increase of 6.02%, pushing its market cap to $190.2 billionCitigroup announced a net profit of $2.86 billion for the December quarter and proposed a $20 billion share buyback, while also lowering its tangible common equity return target, leading to a stock price increase of 6.49%, resulting in a market cap of $148.03 billionWells Fargo, the fourth-largest commercial bank based on assets, benefited from stable growth in investment banking revenues, resulting in a 47% profit increase to $5.08 billion, while its stock price jumped by 6.69%, achieving a market cap of $252.87 billionAsset management firm BlackRock also exceeded expectations in its fourth-quarter earnings, reporting a year-over-year adjusted net profit growth of 29% to $1.874 billion, while recording a record net inflow of $641 billion for the year, resulting in a 5.19% stock increase and a market cap of $156.92 billion.

Despite the excitement in stock markets, the anticipated interest rate cuts triggered a modest decline in the dollar's valueThe dollar index dipped slightly but remained above the 109 markUnforeseen drops in inflation data out of the UK eased investors’ concerns about inflationary pressures, coupled with potential rate cuts from the European Central Bank aimed at stimulating economic growth, all contributing to the dollar's relative performance

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