On Wall Street, stocks are generally up on Wednesday after inflation eased last month but still came in worse than expected. After waffling between gains and losses in early trading, the S&P 500 was 0.5 percent higher. As of 11 a.m. Eastern time, the Dow Jones Industrial Average was up 229 points, or 0.7 percent, at 32,390, while the Nasdaq composite was 0.4 percent lower, as tech stocks again lagged the market.
Investors also found some glass-half-full signals in the data that inflation may be peaking and set to ease further. Nevertheless, the numbers were still higher than economists forecast. They also showed a bigger increase than expected in prices outside food and gasoline, something economists call “core inflation” and which can be more predictive of future trends.
Wall Street has been transfixed on the nation’s high inflation, and where it’s heading, because it’s causing the Federal Reserve to yank the supports it propped under markets for most of the pandemic. The Fed has flipped aggressively toward raising interest rates after seeing high inflation last longer than it expected. Wednesday’s report from the US Labour Department showed inflation slowed a touch in April, down to 8.3% from 8.5% in March.
”Core inflation came in hot, and that’s what really matters to the Fed at this point,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. Economists said the inflation report will keep the Fed on track for rapid and potentially sharp increases in interest rates in upcoming months, though the data led to erratic trading on Wall Street.
To corral high inflation, the Fed has already pulled its key short-term interest rate off its record low near zero, where it spent most of the pandemic. It also said it may continue to hike rates by double the usual amount at upcoming meetings. Such moves by design would slow the economy, in hopes of quashing inflation.
Treasury yields initially jumped but pared their gains as the morning progressed. As the yields regressed, most stocks reversed their early losses. The 10-year Treasury yield climbed as high as 3.08% but was back to 2.99% in later trading. The two-year yield, which moves more on expectations for Fed action, rose to 2.69% from 2.62% late Tuesday. It had climbed as high as 2.75% shortly after the report’s release.
The Fed risks causing a recession if it raises rates too high or too quickly. Even if it’s deft enough to avoid a downturn, higher rates push down on prices for stocks and all kinds of investments in the meantime. That’s because higher-yielding, safe Treasury bonds suddenly become a stronger competitor for investors’ dollars.
Higher rates are most hurting the investments that were the biggest winners of the ultra-low rates of the pandemic. That includes big technology companies, other high-growth stocks and even cryptocurrencies. The Nasdaq’s loss of roughly 25% so far this year is considerably worse than the nearly 16% drop for the S&P 500, for example.
Coinbase, a crypto trading platform, tumbled 23.7% after it reported much weaker results for the latest quarter than analysts expected. Drops in crypto prices dragged on trading volumes through the quarter. It’s not just interest rates that are pushing markets lower. In China, shutdowns meant to stem COVID are raising the risk of more supply chain disruptions for global companies and a slowdown in the world’s second-largest economy. The war in Ukraine, meanwhile, is threatening to keep inflation high because of disruptions to the oil and natural gas markets. Crude jumped again on Wednesday, with a barrel of benchmark US oil rising 4.9% to $104.66. Brent crude, the international standard, added 5% to $107.58. That helped energy stocks in the S&P 500 jump 3.5%, by far the biggest gain among the 11 sectors that make up the index. Exxon Mobil rose 3.5%, and ConocoPhillips spurted 3.7% higher.
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