U.S. stocks opened mixed Tuesday and turned negative after new data showed inflation retreating only slowly, supporting the idea of interest rates staying ‘higher for longer’ ahead of a Federal Reserve rate announcement Wednesday.
How stocks are trading
- The S&P 500 eased 12 points, or 0.2% to 4609
- The Dow Jones Industrial Average lost 17 points, or 0% to 36387
- The Nasdaq Composite decreased 27 points, or 0.1% to 14405
On Monday, the Dow Jones Industrial Average
DJIA
rose 157 points, or 0.43%, to 36405, the S&P 500
SPX
increased 18 points, or 0.39%, to 4622, and the Nasdaq Composite
COMP
gained 29 points, or 0.2%, to 14432.
What’s driving markets
Investors have new inflation numbers to weigh, a day ahead of another Federal Reserve interest rate decision.
Month over month, the U.S. cost of living increased 0.1%, coming in slightly higher than expectations for no monthly increase.
Year over year, inflation eased to 3.1% from 3.2%, in line with estimates. Core inflation after stripping away food and energy prices increased to 0.3% month over month and stayed unchanged year over year, also in line with expectations.
So what’s the upshot on a print that was mostly in line with expectations? It was “somewhere between bad and good,” according to Ali Jaffery, economist at CIBC Capital Markets.
“Today’s Core CPI print was below expectations,” Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management.
“The broader trend in inflation is intact, with the underlying trend still consistent with something much lower than we have experienced over the last two years but still above the Fed’s 2% target, with the last mile the hardest part of the journey,” said Josh Jamner, investment strategy analyst at ClearBridge Investments.
The S&P 500 index sits at its best level since March 2022, having rallied 20.4% so far this year, partly on hopes slowing inflation will allow the Federal Reserve to start cutting interest rates in coming months.
The central bank is widely expected to leave borrowing costs unchanged at a range of 5.25% to 5.50% at the conclusion of its two-day meeting on Wednesday.
“Nothing in this print suggests rate cuts are on the immediate horizon and is consistent with the Fed’s higher for longer stance,” said Jamner at ClearBridge Investments.
Fed-funds futures are now eyeing a rate cut in May, instead of March. The chance of a quarter point cut in May climbed to 50%, up from 40% a week ago, according to the CME FedWatch tool.
The November inflation numbers were “a little bit of a mood dampener,” said Seema Shah, Chief Global Strategist at Principal Asset Management.
“Simply put, this isn’t enough inflation deceleration to reassert or justify the market’s policy easing expectations, particularly at a time when the labour market is still so solid. Tomorrow, Powell should push back at the recent market narrative. And if he doesn’t, we’ll know exactly where the Fed stands,” Shah said.
The European Central Bank and the Bank of England are also expected to stand pat on interest rates following their meetings on Thursday.
“Although no one expects any surprises from central bankers in terms of their decision, it will be their tone and choice of words with the power to send any anticipated Santa rally hurtling in the other direction,” said Danni Hewson. AJ Bell head of financial analysis.
Traders also will be keeping an eye on a $21 billion auction of 30-year bonds by the U.S. Treasury, due at 1 p.m. Last month’s 30-year auction was not well-received and sparked a spike in yields and volatility in stocks.
Equity investors need to be wary of the CPI data coinciding with bonds giving up some of their recent gains and for yields to reverse higher again, according to Mark Newton, head of technical strategy at Fundstrat,
“Treasury yields look to be starting to turn back higher, and I suspect the CPI report might prove to be the catalyst for TNX
XX:TNX
[the CBOE 10 Year Treasury Note Yield Index index] getting back over 4.30%,” said Newton.
“This would likely prevent stocks from making too much further headway given recent correlation trends. However, yields have indeed risen over the last few trading days and stocks thus far have not been affected,” he added.
Companies in focus
- Oracle Corp. shares are more than 9% lower in early trading Tuesday after earnings results Monday afternoon missed revenue expectations. Revenue in the fiscal second quarter was $12.94 billion while FactSet consensus was for $13.05 billion.
- Ford Motor Co. shares are edging 0.2% higher, after reports the company is sharply cutting back on electric F-150 Lightning pickup truck production.
