Close: Wall Street rises after CPI data, but Fed concerns remain

U.S. stocks rose on Tuesday after a surprise small rise in consumer prices boosted optimism that the Federal Reserve could soon roll back its inflation-inhibiting rate hikes, but concerns remained that the central bank could remain aggressive. The Toronto Stock Exchange closed little changed, with gains in the energy and materials sectors mostly offset by losses in heavyweight financials.

The benchmark S&P 500 rose 2.76% to a three-month high earlier in the session on news that U.S. consumer prices barely rose in November as gasoline and used-car costs fell, leading to the smallest increase in nearly a year. The annual inflation rate was 7.1%.

Rising expectations for the magnitude and slowdown of Fed rate hikes sent U.S. Treasury yields sharply lower and helped lift rate-sensitive gauges such as the S&P 500 Growth Index up 1.18% and the S&P 500 Real Estate Index up 2.04% % to near an intraday high in three months. The real estate sector posted its biggest one-day percentage gain in two weeks and was the best performer of the 11 major sectors.

Fed funds futures prices imply a greater-than-even chance of the Fed raising rates by half a basis point this week, by 25 basis points at its first two meetings in 2023, and stopping below 5 percent by March.

Ellen Zentner, chief U.S. economist at Morgan Stanley, now sees a smaller Fed rate hike, at 25 basis points at the February meeting, and no further hikes in March, with the fed funds rate remaining at 4.625% Peak.

Still, stocks pared gains ahead of the Fed’s policy statement on Wednesday, in which the central bank is widely expected to announce a 50 basis point rate hike.

Jason Ware, chief investment officer at Albion Financial Group, said in 2018: “Earlier, it was exciting to see the CPI data coming in again below expectations – it showed some sequential cooling – but once we saw the initial uptick, equity investors will be reassessed.” Salt Lake City, Utah.

“Once investors realize that tomorrow it’s likely to be (Fed Chairman) Jerome Powell pouring cold water on today’s rally, that could take some steam off the market.”

The Dow Jones Industrial Average rose 103.6 points, or 0.3 percent, to 34,108.64, the S&P 500 gained 29.09 points, or 0.73 percent, to 4,019.65 and the Nasdaq Composite gained 113.08 points, or 1.01 percent, to 11,256.81.

Energy shares rose 1.77%, one of the best-performing S&P sectors on the day, as weaker-than-expected inflation data sent the dollar lower and boosted crude oil prices.

Last week’s November producer price report released data on consumer inflation that came in slightly above expectations but suggested a slowing trend.

Still, some question whether the price trend will continue.

“Today’s CPI data is gradually improving, but it needs to be sustained,” said Venu Krishna, head of U.S. equity strategy at Barclays in New York.

“Whether we can actually hit 2% inflation (the Fed target) is a big question mark. Maybe we live in a higher world, which means higher rates and then definitely lower multiples. “

The S&P/TSX composite index on the Toronto Stock Exchange closed up 3.76 points at 20,023.46, having touched 20,341.26, its highest level in more than a week earlier in the day.

The energy sector in Toronto rose 1.5 percent as U.S. crude futures settled 3 percent higher at $75.39 a barrel.

Materials stocks , which include precious and base metals miners and fertilizer companies, also rose, ending 1.4 percent higher, as gold and copper prices rose.

A 1.4 percent drop in the heavily weighted financials sector limited the index’s gains, with BMO shares down 1.8 percent after it announced a common stock offering.

On Wall Street, Moderna Inc soared 19.63% after the biotech’s experimental vaccine showed encouraging results in a skin cancer study with Merck & Co’s blockbuster drug Keytruda. Merck shares rose 1.78%.

Pinterest Inc jumped 11.90% after Piper Sandler upgraded the social media platform’s stock to “overweight” from “neutral.”

Advancers outnumbered decliners on the NYSE by a 2.83-to-1 ratio; on Nasdaq, a 1.49-to-1 ratio favored advancers.

The S&P 500 recorded 18 new 52-week highs and 1 new low; the Nasdaq Composite recorded 92 new highs and 212 new lows.

The benchmark U.S. Treasury 10-year yield, which moves inversely to prices, fell about 15 basis points after the inflation data before climbing to 3.506%, but was still down more than 10 basis points on the day.

Canadian bond yields also retreated, with the 2-year yield down 11.1 basis points to 3.775%.

Reuters, Global Staff

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