Dow jumps more than 500 points as cooling July inflation drives hopes for a Fed 'pivot'

Average US gas prices fell in July. CHANDAN KHANNA/AFP via Getty Images

• The Dow surged more than 500 points and the Nasdaq soared nearly 3% after the July CPI report. 
• Headline inflation cooled to 8.5% from 9.1% in June and came in below expectations. 
• Investors are pricing in expectations the Fed will ratchet down the size of its likely rate hike in September. 

US stocks sharply jumped Wednesday after an ease in inflation figures in July fueled the view that the Federal Reserve may opt to ratchet down the size of its upcoming interest-rate hikes. 

The S&P 500 snapped a four-session losing streak and hit the highest level since May. The gains came after the Bureau of Labor Statistics said headline inflation rose to 8.5% in the year through July. That was slower than June's 9.1% rate and below the Bloomberg consensus estimate of 8.7%. 

Core CPI, which excludes more volatile food and energy prices, was unchanged at 5.9%. July's month-over-month increase of 0.3% was smaller than the 0.7% monthly gain in June. 

Investors during the session priced in a nearly 60% chance the Fed will deliver a rate hike of 50 basis points in September, rather than a larger increase of 75 basis points. 

"The Fed can now exhale" with inflation data coming off higher levels, although "it's still running at a worryingly high rate," Rick Rieder, BlackRock's chief investment officer of global fixed income, said in a note. 

Here's where US indexes stood at 4:00 p.m. on Wednesday: 

• S&P 500: 4,210.24, up 2.13%
• Dow Jones Industrial Average: 33,309.84, up 1.63% (535.43 points)
• Nasdaq Composite: 12,854.80, up 2.89%

"Over time, we think the slowdown in economic growth (globally), the continuation of the Federal Reserve's assertive hiking cycle and the possibility of resolution with several persistent supply chain issues should influence broad inflation lower," said Rieder. "Still, while core PCE inflation (the Fed's favored measure) is likely to moderate in the coming months, it will still remain well-above the Fed's 2% inflation target."

Around the markets, Wharton professor Jeremy Siegel says forward-looking inflation allows the Fed to be more moderate with upcoming rate hikes. 

US gas prices have dropped below $4 a gallon for the first time since March, according to GasBuddy. But Goldman Sachs expects prices to rise again. 

Elon Musk has sold $7 billion worth of Tesla shares to raise cash in case he's forced to buy Twitter. According to Wedbush's Dan Ives, the move by Musk is writing on the wall that his Twitter takeover deal is likely to go through. 

Oil prices were mixed. West Texas Intermediate crude moved up 1% to $91.67 per barrel. Brent crude, the international benchmark, shed 0.2% at $97.11. 

Gold was off 0.4% at $1,805.30 per ounce. The 10-year Treasury yield flipped higher, up 3 basis points to 2.78%. 

Bitcoin gained 2.1% to $23,653.09.