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Shares of Carnival (NYSE: CCL) were heading higher this week, even though there was no company-specific news.

Instead, shares of the world’s biggest cruise line operator surged on macroeconomic news after Tuesday’s Consumer Price Index report that showed that inflation fell faster than expected in October. That was seen as a big positive for Carnival. Because it is carrying a lot of debt on its balance sheet and operates in a highly cyclical industry, it has significant interest rate exposure, and falling inflation makes it more likely that the Federal Reserve won’t raise interest rates further. That would be good news for Carnival.

The stock rose 8.7% on Tuesday and added another 4.9% on Wednesday. As of Friday at 12:49 p.m. ET, the stock was up 15.2% for the week, according to data from S&P Global Market Intelligence.

Image source: Getty Images.

Carnival gets a little help

The CPI report showed that inflation was flat on a month-over-month basis in October, and up 3.2% from a year ago, its slowest growth rate in more than two years. The core CPI, which excludes the volatile food and energy categories, and which the Fed tends to favor as a gauge of the economy, was up by 4% from a year earlier, its slowest growth rate in more than two years. However, it was still well above the Fed’s target of inflation in the neighborhood of 2%.

The report sent stocks soaring broadly and was especially good news for Carnival for a number of reasons. First, lower interest rates, or at least the end of interest rate hikes, will help Carnival control its variable-rate interest expenses, and make it easier for the company to refinance debt.

Most of the company’s debt is fixed rate, but as of the end of fiscal 2022, Carnival had roughly $12 billion in variable-rate debt, and a significant portion of its fixed-rate debt will mature by 2027. It may need to refinance much of that debt.

Interest rate expenses have become a significant headwind for the business even as its operations are performing well.

Additionally, lower interest rates will help support consumer spending, which is good for Carnival as leisure travel is highly discretionary. Slowing inflation should also give consumers more money to spend on vacations as prices for essentials like food and gasoline normalize.

What’s next for Carnival

The cruise operator was a big winner early this year as it enjoyed record bookings and demand, making it clear that the cruise industry was back after enduring a roughly yearlong shutdown during the early stages of the pandemic.

The stock should continue to react positively if there are more signs that the Fed is done with this cycle’s streak of interest rate hikes. Investors should pay attention to what the Federal Reserve does and says at its meeting next month, as reducing the company’s more than $2 billion in interest expenses will be key to restoring it to full health.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool recommends Carnival Corp. The Motley Fool has a disclosure policy.

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