Nasdaq rallies as investors cheer inflation data, Alphabet

By Carolina Mandl and Shristi Achar A

(Reuters) - The Nasdaq ended Wednesday at its highest intraday level in more than eight months, boosted by a slightly lower-than-expected increase in April inflation and Alphabet (NASDAQ:GOOGL) Inc's latest artificial intelligence rollout.

The Labor Department's Consumer Price Index (CPI) rose 4.9% in April from a year ago, compared with expectations of a 5% increase, raising hopes that the Federal Reserve's interest rate hiking cycle is close to an end. Month-over-month CPI in April rose 0.4% after gaining 0.1% in March.

"Markets reacted positively because they saw the inflation data as a small positive," said Michael Harris, president at hedge fund Quest Partners LLC. "The Fed is in a pause now. They've done their last rate hike and they're going to wait and see for the next couple of months."

The Nasdaq was helped by a 4.10% climb in Alphabet as the company rolled out more artificial intelligence for its core search product in response to competition from Microsoft Corp (NASDAQ:MSFT).

Large-cap tech stocks including Apple Inc (NASDAQ:AAPL) and Microsoft also gained 1.04% and 1.73%, respectively.

The rate-sensitive S&P 500 technology sector index went up 1.22% and the communication services rose 1.69%.

"The CPI is indicating some sort of relief in inflationary pressure. That would mean the Fed would be toward the end or already at the end of its interest rate cycle, and growth companies are most heavily affected by higher interest rates," said Kevin W. Philip, a partner at investment advisor Bel Air.

Growth companies rely more on borrowed money so they benefit from lower rates.

Fed funds futures traders are pricing in a pause in rate increases at the central bank's June meeting, and less than a 5% chance of another 25 basis point hike.

"The market is pricing in a Fed cut beginning this summer. While inflation is decelerating, it's not decelerating at a pace that would justify cutting the Fed funds rate anytime before the fourth quarter of 2023," said Matthew Palazzolo, senior investment strategist at Bernstein Private Wealth Management.

Indexes were choppy during the session, as investors digested the positive inflation print with concerns about the looming debt ceiling.

Talks on raising the U.S. federal government's $31.4 trillion debt ceiling entered a new phase on Wednesday as some areas of potential compromise emerged after Tuesday's White House meeting.    The Dow Jones Industrial Average fell 30.48 points, or 0.09%, to 33,531.33; the S&P 500 gained 18.47 points, or 0.45%, at 4,137.64; and the Nasdaq Composite added 126.89 points, or 1.04%, at 12,306.44.

Volume on U.S. exchanges was 11.04 billion shares, compared with the 10.7 billion average for the full session over the last 20 trading days.

Regional bank shares extended declines from volatile sessions last week on concerns about the sector's health. PacWest Bancorp and Zions Bancorporation (NASDAQ:ZION) inched lower 0.49% and 2.74% respectively.

Oil and gas producer Occidental Petroleum Corp (NYSE:OXY) fell 3.58% after its first-quarter earnings fell short of analysts' estimates.    Livent (NYSE:LTHM) Corp rose 5.24% after Australian lithium miner Allkem Ltd agreed to merge with the U.S.-based chemical manufacturing firm to create a $10.6 billion firm.      Airbnb Inc lost 10.92% as the vacation rental booking company had fewer bookings and lower average daily rates in the second quarter.    Rivian Automotive jumped 1.80% after the electrical vehicle maker beat estimates for its first-quarter results and reiterated its annual production forecast.

Advancing issues outnumbered decliners on the NYSE by a 1.32-to-1 ratio; on Nasdaq, a 1.40-to-1 ratio favored advancers.

The S&P 500 posted 18 new 52-week highs and 11 new lows; the Nasdaq Composite recorded 86 new highs and 152 new lows.