October's inflation report 'broke the hiking cycle's back,' and signals the Fed is done raising rates, Bank of America says

• Bank of America changed its Fed outlook on Tuesday after a softer-than-expected CPI report.
• Strategists wrote that they believe the rate-hiking cycle is now over.

October's softer-than-expected inflation reading prompted Bank of America on Tuesday to change its outlook on further interest rate increases, with strategists declaring that the Federal Reserve's rate hiking cycle is over.

Inflation in October came in at 3.2% year-over-year, down from 3.7% in September and the lowest reading since June. Core inflation, meanwhile, accelerated 4% year-over-year, also below the consensus forecast.

In its note on Tuesday, the bank called the report "the straw that broke the hiking cycle's back." Before this week, the bank had argued that Fed officials were leaning toward a no-hike move in December, though it still adopted a "wait and see" approach with incoming data. Tuesday's benign reading affirmed that forecast, in the bank's view.

"Therefore, we have changed our Fed call," the strategists said. "We now think that the hiking cycle is over. Markets agree: at the time of this writing, they are pricing less than a 10% probability of another hike."

Bank of America said that it would take a significant re-acceleration in inflation for the Fed to resume hiking its benchmark rate in 2024, a scenario that does not fall within the firm's base case.

The strategists expect cuts to begin in June 2024, and move at a pace of one cut per quarter.

"The October CPI report is undeniably good news," strategists maintained. "However, we must remember that September was bad news and that monthly inflation data can be very choppy. That said, we have seen significant disinflation to date, which is good news for the Fed. The path forward is likely to remain bumpy, but we do think that further disinflation is likely over the coming years.

The stock market, meanwhile, reflected BofA's optimism.

By midday in New York, the S&P 500 had climbed 1.8%, the Dow Jones Industrial Average gained 1.46%, and the tech-heavy Nasdaq was up more than 2%.

Fairlead Strategies' Katie Stockton on Tuesday said the S&P 500's strong gains over the last several days point to bullish seasonality, and that the index should push higher as the year winds down.

"The S&P 500 confirmed its breakout above minor resistance from the daily cloud model yesterday in a positive short-term technical catalyst," Stockton said. "The breakout increases the likelihood of a test of more important resistance near 4,600 between now and year-end."