Markets continued to challenge the Fed’s rate-hike view Thursday following the slowest annual inflation reading in more than a year in December.
Updated at 10:14 am EST
U.S. stocks were active in early Thursday trading following a key December inflation reading that showed a sixth consecutive monthly decline in consumer prices that could add more pressure on the Fed to alter its monetary tightening stance.
Headline inflation declined in December, the Commerce Department said Thursday, while the annual reading slowed to an expected rate of 6.5%, the lowest since October of 2021. So-called core inflation, which strips out food and energy costs, also eased to 5.7% on the year and 0.3% on the month, with both figures largely matching Street forecasts.
Stocks were primed for a softer reading, however, after the S&P 500 extended its 2023 gain last night to around 2.1% and lifting the benchmark closer to its 200-day moving average, an important technical trading level that it hasn’t met since the market sold-off in mid December.
Last night’s gains were powered in part by fading inflation forecasts and easing rate bets, linked to a better-than-expected auction of $32 billion in 10-year Treasury notes, which saw the strongest demand since August a big increase in foreign buying interest, that helped push bond yields lower across the curve, boosting tech stocks and adding to the session’s optimism.
Philadelphia Fed President Patrick Harker supported at least some of the optimism, telling a business event in Pennsylvania that “I don’t think we need go much further than 5%” in terms of a peak Fed Funds rate, adding that the days of 75 basis points hikes are “behind us”.
Benchmark 10-year note yields was last seen 5 basis points higher at 3.545% following the CPI reading while 2-year notes fell 5 basis points 4.168%. The U.S. dollar index, which tracks the greenback against a basket of its global currency peers, was marked 0.18% lower at 103.00, the lowest since early July.
The CME Group’s FedWatch is now pricing in an 91.2% chance of a 25 basis point Fed rate hike on February 1, up from 77% prior to the CPI release and just 35.1% in early December.
Inflation Extends Long Slide To 6.5% in December, Pressuring Fed
On Wall Street, the S&P 500 was marked 1 point higher from last night’s close in the opening hour of trading while the Dow Jones Industrial Average gained 95 points. The tech-focused Nasdaq, which is on its best four-day run since November, was down 10 points.
In terms of notable early movers, Walt Disney (DIS) – Get Free Report shares jumped 3.4% after the media and entertainment group named former Nike (NKE) – Get Free Report CEO Mark Parker to head its board of directors while revealing a push for changes from activist Nelson Peltz.
American Airlines (AAL) – Get Free Report shares powered 5.8% higher after the biggest U.S. carries boosted its fourth quarter profit forecast amid the ongoing surge in domestic travel demand and a solid holiday season that saw it capitalize on the challenges faced by rival Southwest Airlines (LUV) – Get Free Report.
Taiwan Semiconductor Manufacturing Co. (TSM) – Get Free Report rose 35.6% after the world’s biggest contract chipmaker and a lead supplier for Apple AAPL iPhones posted record December quarter profits, but lowered its capital spending plans amid a pullback in global demand.
KB Home (KBH) – Get Free Report fell 3.4% after the single-family homebuilder posted weaker-than-expected fourth quarter earnings and a muted 2023 forecast amid what it called “significant uncertainty and limited forward visibility” in the U.S. housing market.
In overseas markets, the the region-wide MSCI ex-Japan index rose 0.19% to a seven-month high into the close of trading, boosted by an in-line reading for China inflation over the month of December and ongoing bets that its re-opening momentum will boost broader economic growth.
Europe’s Stoxx 600 was marked 0.72% higher in mid-day Frankfurt dealing, while London’s FTSE 100 was up 0.81%.
