NEW YORK (AP) — Wall Street edged higher on Thursday after a report showed inflation slowed again last month, boosting hopes that the Federal Reserve can ease the economy with a smaller interest rate hike.
The S&P 500 was 0.5% higher after trading between small gains and losses in the morning. While the US inflation report was clearly encouraging, stocks had already rallied earlier this week in anticipation of just such data. The numbers were in line with forecasts at many points, and analysts warned investors not to get carried away.
The Dow Jones industrial average was up 288 points, or 0.9%, at 34,261 by 12:30 a.m. ET, and the Nasdaq was 0.5% higher. Previously, they also fluctuated between profits and losses.
The country’s painfully high inflation has been at the center of wild moves on Wall Street for more than a year. Recently, stocks have been rising and bond yields have been falling on hopes that cooling inflation from a summer peak may prompt the Federal Reserve to moderate a flurry of rate hikes. Such increases can suppress inflation, but they do so by slowing the economy and risking a recession. They also hurt investment prices.
In the bond market, Thursday’s inflation report sent yields further down as traders are increasingly confident the Fed will reduce the size of its next rate hike. They are now widely forecasting an increase of just 0.25 percentage point next month, down from a half-point increase in December and from four previous increases of 0.75 percentage point.
Many traders are betting on the Fed to follow through with perhaps another quarter-point hike, but then possibly take a break, according to CME Group data.
Analysts warned that while Thursday’s inflation report showed inflation at its least debilitating level in more than a year, it still left room for continued pressure on the economy from high rates. They warned that more big swings could be coming to the markets.
“While we can say with certainty that we are past the peak of inflation, it is too early to call it a victory in the fight against higher inflation,” said Gargi Chaudhuri, iShares head of investment strategy, Americas.
Analysts also cautioned investors not to think of a slower rate hike or the coming halt in hikes as the same thing as a rate cut, which some investors hope could happen later this year. Such cuts can act as rocket fuel for markets.
While inflation slowed to 6.5% last month from a peak of more than 9% in June, it is still too high for the Fed and American households to like. The central bank is adamant that it plans to continue raising rates this year and that it won’t cut rates until 2024 at the earliest.
Of course, his forecasts have proven wildly wrong in the past, such as when officials called the initial spike in inflation due to the pandemic a “transitory” problem.
Some areas of the economy remain strong and threaten to sustain inflationary pressures. The main one is the labor market. A report on Thursday showed that fewer workers filed for unemployment benefits last week. That’s a sign that layoffs remain low, even as some major tech companies announced job cuts.
Of course, a strong labor market is good for workers, especially when their raises don’t keep up with inflation. But the Fed says it doesn’t want wage gains to be too high. This could create a vicious cycle where companies raise prices to cover their higher costs and only exacerbate inflation.
The yield on the 10-year Treasury, which helps set rates for mortgages and other loans that dictate the economy, fell to 3.48% from 3.54% late Wednesday. The two-year yield, which tends to track Fed expectations more closely, fell to 4.14% from 4.22%.
Airline stocks posted some of the biggest gains on Wall Street after American Airlines said it expects higher-than-expected revenue and profit in the final three months of 2022. It rose 6.9%, while United Airlines gained 4.7% . .
Earnings season is set to begin in earnest on Friday, with JPMorgan Chase and UnitedHealth Group headlining the day. One big concern on Wall Street is that high inflation and a slowing global economy are eating into the profits of major companies.
Analysts say it could be the first time earnings per share of S&P 500 companies have fallen from year-ago levels since 2020.
AP Business Writers Yuri Kageyama and Matt Ott contributed.
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