Stocks rise amid optimistic inflation data

U.S. stocks gained Tuesday amid another cooler-than-expected inflation report, even as fresh geopolitical tension threw a wrench into the rally midday.

The S&P 500 (^GSPC) closed higher by 0.8%, while the Dow Jones Industrial Average (^DJI) inched higher by 0.1%. The technology-heavy Nasdaq Composite (^IXIC) jumped 1.5% higher, for its best close since September.

Wall Street rallied on new signs of optimism that inflation may be cooling. October’s producer price index (PPI) declined to 8% annually, down from 8.5% in September, after economists surveyed by Bloomberg forecasted 8.3%.

Annual core PPI also surprised at 6.7% year over year, compared to a consensus estimate of 7.2%. The PPI report comes after other key inflation data came in lower than expected last Thursday, with consumer prices rising 0.4% in October and core prices adding 0.3%.

“Core PPI and the core PCE deflator follow very similar tracks, though the surge in rents this year has driven an unusually large wedge between them,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a note following the PPI release. “But the pace of rent increases has peaked, and our chart suggests that the steep drop we expect to see in core PPI inflation will drag down the core PCE measure faster than markets and the Fed expect.”

Stocks pared early gains in the afternoon after Polish Prime Minister Mateusz Morawiecki convened a security meeting. According to the Associated Press, a senior U.S. intelligence said Russian missiles crossed into Poland, killing two people.

Investors also watched more geopolitical moves, as U.S. President Joe Biden’s met with China President Xi Jinping, the first between the leaders of the world’s two largest economies since Biden took office.

Yields on the benchmark 10-year Treasury note moved higher Tuesday to around 3.7%, while the dollar index, which measures the currency against six counterparts including the yen and euro, slipped 0.25% to $106.39 Wednesday afternoon.

Tuesday’s trading resumed a broad market rally after stocks finished lower Monday as investors digested fresh commentary from Federal Reserve officials on the outlook of interest-rate hikes. Fed Vice Chair Lael Brainard on Monday stated said she thought it would be “appropriate soon to move to a slower pace of increases.”

Some strategists argued that Monday’s lows weren’t due to Brainard’s commentary but more of a signal to what could be ahead.

“The latest in a mounting wave of evidence that the FOMC will move 50 bps in December rather than the 75 bps pace they’ve been at since June,” strategists at Bespoke Investments wrote in a note to clients.

Brainard’s comments came after Fed Governor Christopher Waller reiterated Fed Chair Jerome Powell’s recent comments that policymakers have “some ways to go” before the central bank stops raising rates.

“The inflation conversation is being adaptive to the soft landing narrative so far,” Thomas Kennedy, J.P. Morgan Global Wealth Management chief investment strategist, told Yahoo Finance Live on Tuesday.

But “inflation is only sequentially trending lower than expected. And the real question will become what is the level of inflation that the Fed is really fighting,” Kennedy added.

The sentiment on stocks and global growth among fund managers surveyed by Bank of America remained “uber-bearish” with a macro outlook of “92% predicting ‘stagflation’ in 2023,” strategists led by Michael Hartnett wrote in a note on Tuesday.

U.S. President Joe Biden shakes hands with Chinese President Xi Jinping as they meet on the sidelines of the G20 leaders' summit in Bali, Indonesia, November 14, 2022.  REUTERS/Kevin Lamarque

U.S. President Joe Biden shakes hands with Chinese President Xi Jinping as they meet on the sidelines of the G20 leaders’ summit in Bali, Indonesia, November 14, 2022. REUTERS/Kevin Lamarque

In corporate news, Home Depot (HD) kicked off a major retailer earnings week by reporting sales that rose 5.6% in the third quarter, topping analyst expectations, as higher prices offset a slowdown in transactions. Walmart (WMT) also beat Wall Street expectations for the quarter and raised its outlook, as the retailer “significantly improved” its excess inventory. The discounter’s inventory was up 13% year-over-year in the third quarter, down from 25% in the previous quarter.

With inflation still high, Walmart’s results also showed that those with bigger wallets are getting squeezed, too.

“We’ve continued to gain grocery market share from households across income demographics with nearly three-quarters of the share gain coming from those exceeding $100,000 in annual income,” John David Rainey, executive vice president and chief financial officer at Walmart, said on the earnings call Tuesday.

Target (TGT), Lowe’s (LOW), and TJMaxx (TJX) are also set to release earnings on Wednesday.

Elsewhere, cryptocurrency prices stabilized after last week’s bankruptcy filing by FTX. Bitcoin (BTC) traded at $16,969.78 Tuesday midday, while Ethereum (ETH), the second most-popular cryptocurrency, traded up at $1,264.22.

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv

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