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Market Snapshot: U.S. stocks end higher, with Nasdaq up for 5th day, as inflation slows

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U.S. stocks rose in afternoon trade on Thursday, shaking off earlier losses after the December consumer-price index showed inflation continued to wane last month, but not by a wide enough margin to prompt the Federal Reserve to reconsider further interest-rate hikes.

How are stocks trading

The S&P 500
SPX,
+0.48%

was up 22 points, or 0.6%, to 3,992.

The Dow Jones Industrial Average
DJIA,
+0.70%

gained 268 points, or 0.8%, to 34,241.

The Nasdaq Composite
COMP,
+0.61%

advanced 73 points, or 0.7%, to 11,004.

Stocks rose on Wednesday in anticipation of Thursday’s inflation report, with the Dow gaining 269 points, or 0.8%, to 33,973, according to FactSet data.

What’s driving markets

U.S. stocks wavered in choppy morning trade Thursday in the aftermath of the December CPI report which largely met expectations for a reduction in inflation. Three major indexes then pushed higher around midday after St. Louis Federal Reserve Bank President James Bullard said the probability of a soft landing has increased due to “encouraging” inflation data.

Data showed the annual rate of headline inflation retreated in December for the sixth month in a row, declining to 6.5% from 7.1% in November. This represents the lowest reading in more than a year and a significant improvement from the 40-year peak of 9.1% seen last summer.

On a month-over-month basis, headline prices actually declined by 0.1%, as economists had expected. It marked the first such decline in more than two years.

See:This key inflation gauge is still flashing warning signs for the economy

However, market analysts said some traders had been hoping to see a more significant decline, after inflation came in lower than economists had expected during the prior two months. Core data rose 0.3% in December, which was in line with economists expectations.

“The release is a little underwhelming. Not only are the numbers exactly in line with consensus expectations, but they don’t really clear up the 25bps vs 50bps question for the Fed’s February meeting and add nothing to the late-2023 Fed pivot debate either,” said Seema Shah, chief global strategist at Principal Asset Management.

But fed-funds futures traders have further increased bets on a 25 basis point, or quarter-point, move in February, after Philadelphia Fed President Patrick Harker said quarter-point moves would likely be appropriate going forward. Fed-funds futures now reflect a 94.2% probability of a 25-basis point rise in February, up from around 77% on Wednesday, according to CME FedWatch Tool.

See: Traders overwhelmingly expect 25 basis point February rate hike

Tim Courtney, chief investment officer of Exencial Wealth Advisors, contends that the stock market has anticipated the cooling data points over the past week, and investors have been right to start the market on a positive note so far in 2023.

However, he told MarketWatch that he still thinks there are “enough problems” to keep inflation elevated for “several more quarters” as investors deal with “distortions” in different parts of the economy.

Late last week, stocks cheered signs of slowing wage growth in the December jobs report. But while wage-growth has slowed, it still has much further to fall to satisfy the Fed, Sterling said.

Treasury yields declined after the CPI report, with the yield on the 10-year note
TMUBMUSD10Y,
3.452%

falling 3.7 basis points to 3.512%.

President Joe Biden addressed the inflation data, saying the decline was “giving families some real breathing room.”

St. Louis Federal Reserve President James Bullard, also said on Thursday that he still wants to get interest rates above 5% “as soon as possible” despite cooling inflation data though “tactics” of future moves don’t matter so much.

See also: Fed’s Bullard favors getting interest rates above 5%, but said the pace is not a critical issue

In addition to the inflation data, investors parsed a weekly report on jobless claims, which showed that the pace of applications for unemployment benefits in the U.S. declined, suggesting that the Fed may need to hike rates more aggressively to achieve a slowdown in the labor market that they believe will be needed to slow inflation.

Though inflation was clearly the focus for Thursday, investors were also aware that the fourth-quarter corporate earnings reporting season kicks into gear on Friday, with big banks, including JPMorgan Chase
JPM,
+0.47%
,
Citigroup
C,
+1.08%

and Bank of America
BAC,
+0.83%

presenting their results.

“The fear in the market is that we may be on the cusp of an earnings cliff, with the combined effects of softening demand resulting from the extraordinary Fed tightening and persistent cost pressures prompting management teams across many industries to provide downbeat guidance,” Zacks Research Director, Sheraz Mian, wrote in a note Thursday.

Financial sector profits are expected to fall 6.3%, according to S&P Global Market Intelligence, with earnings for the whole S&P 500 forecast to contract 2.8%.

Companies in focus

American Airlines Group Inc.
AAL,
+8.96%

shares advanced 9% on Thursday after the carrier said it expects stronger profit in the fourth quarter. Shares of Delta Air Lines
DAL,
+3.03%

were also higher.

Bed Bath & Beyond Inc.
BBBY,
+31.84%

shares climbed 33.3% after seeing their biggest percentage-point increase ever.

Shares of chipmaker Taiwan Semiconductor Manufacturing Co. 
TSM,
+6.91%

rose 7.6% despite a company warning about falling revenue and lower margins.

Shares of Walt Disney Company
DIS,
+3.99%

rose 3.5% after the company announced Mark Parker, the executive chairman of Nike, as its new chairman. 

—Jamie Chisholm contributed to this article.

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