Market cools as inflation heats up
Overall, the S&P 500 was down 0.2 per cent in afternoon trading after erasing an early gain. The Dow Jones Industrial Average was down 56 points, or 0.2 per cent, as of 1.56 p.m. Eastern time, and the Nasdaq composite was 0.2 per cent lower.
Stocks had been roaring toward record heights on expectations that a cooldown in inflation would convince the Federal Reserve to cut interest rates sharply in 2024, which would boost prices for investments. Thursday morning’s inflation report was seen as a test that could show whether Wall Street’s hopes had gone overboard.
It showed US consumers paid prices that were 3.4 per cent higher overall in December than a year earlier. That’s an acceleration from November’s 3.1 per cent inflation rate and a touch warmer than economists expected.
But trends underneath the surface may have been a bit more encouraging. After stripping out food and fuel prices, which can shift sharply from month to month, the rise in prices from November into December was close to economists’ expectations.
Altogether the data will likely cause traders to push back forecasts for when the first cut to rates will arrive, several analysts said, but they don’t preclude the central hopes that have sent stocks near records: Inflation is cooling, albeit in a jagged way, and the economy looks likely to avoid a bad recession.
“Today’s inflation report reinforces the notion that the market had gotten a little overexcited around the timing of rate cuts,” said Seema Shah, chief global strategist at Principal Asset Management. “These are not bad numbers, but they do show that disinflation progress is still slow and unlikely to be a straight line down to 2 per cent.”
Treasury yields rose immediately after the inflation report when traders trimmed bets that the first cut to rates will arrive as soon as March. But they began wobbling soon after that.
The yield on the 10-year Treasury slipped to 3.98 per cent shortly before the report’s release. It bounced back to 4.02 per cent, just below its late Wednesday level of 4.04 per cent.
The two-year Treasury yield, which more closely tracks expectations for Fed action, went on a similar, shaky run. It sank from Wednesday night into Thursday morning before jumping after the inflation report and then yo-yo-ing a couple of times.
Economists at Bank of America said they’re sticking with their forecast for the first cut to rates to arrive in March, despite the warmer-than-expected inflation data. Some of the drivers of the recent strength, particularly used cars, should fade in coming months, they said in a BofA Global Research report.
Oil jumps
A jump in oil prices put some upward pressure on inflation and yields, as they trimmed their sharp losses from earlier in the week. A barrel of benchmark US crude rose 0.7 per cent to $71.88. Brent crude, the international standard, gained 0.6 per cent to $77.26 per barrel.
Also in the energy industry, natural gas producer Chesapeake Energy jumped 3.4 per cent after it agreed to sell itself to Southwestern Energy in an all-stock deal valued at $7.4 billion. Southwestern slipped 1.9 per cent.
Elsewhere on Wall Street, Citigroup fell 2.1 per cent after it detailed a list of charges it will take against its fourth-quarter results, related to everything from Argentina’s troubled economy to a previously disclosed special assessment by the Federal Deposit Insurance Corp.
Bitcoin swings
In cryptocurrencies, the price of bitcoin was swinging a day after US regulators allowed for the trading of the first exchange-traded funds that hold the digital currency rather than just futures related to it. The hope in crypto world is that by making investing in bitcoin easier, the ETFs will draw new types of investors to the field, including retirement savers and big institutions.
Coinbase Global, which will keep custody of bitcoins for some of the ETFs, climbed at the start of trading but then gave up the gains. It was recently down 6 per cent.
In stock markets abroad, indexes were mixed.
Tokyo’s Nikkei 225 rose 1.8 per cent to its highest finish since February 1990, when Japan’s bubble economy of inflated real estate and stock prices was beginning to deflate. Indexes in Europe, meanwhile, were mostly lower.
With reporting by Herald staff.
