Stocks tick higher on Wall Street as inflation slows further

NEW YORK (AP):

WALL STREET ticked higher yesterday following the latest sign that inflation continues to cool.

The S&P 500 was 0.6 per cent higher in midday trading after a report showed inflation at the wholesale level slowed last month by more than expected. The Dow Jones Industrial Average was up 144 points, or 0.4 per cent, at 33,790, as of 11:15 a.m. Eastern time, while the Nasdaq composite was 1.3 per cent higher.

Yesterday’s report showed that prices paid to producers last month were 2.7 per cent higher than a year earlier, the lowest inflation level there in more than two years. The hope on Wall Street is that easier inflation on the wholesale level will not only support profits for companies, but also flow through to cooler inflation for consumers. A day earlier, a separate report said inflation for consumers slowed to five per cent.

Inflation and how high the Federal Reserve will hike interest rates to tame it have been at the centre of Wall Street’s struggles for more than a year. The Fed has hiked rates at such a ferocious pace over the last year that it’s already slowed parts of the economy and caused strains to appear in the banking system.

A separate report yesterday said slightly more workers applied for unemployment benefits last week than expected, though the job market has remained remarkably resilient. That plus the inflation data pushed traders to shade some bets towards the Fed holding rates steady in May, though the majority still call for another hike of a quarter percentage point.

Big tech stocks

A less aggressive Fed would help Big Tech stocks in particular. High-growth stocks are seen as some of the biggest beneficiaries of lower interest rates, and Apple, Microsoft and Amazon were the three biggest forces lifting the S&P 500, after each rose at least 1.5 per cent.

The Fed has hiked rates at every one of its meetings since early last year, often by double or triple the usual amount. High rates can smother inflation, but only by slowing the entire economy, raising the risk of a recession and hurting prices for investments.

High interest rates and still-high inflation are eating away at corporate profits, and the biggest United States companies are starting to tell investors how much they earned during the first three months of the year. Expectations are low, with forecasts calling for the sharpest drop in earnings since the pandemic was pummelling the economy in 2020.

Delta Air Lines was down 1.3 per cent after flipping between gains and losses through the morning. It reported weaker results for the latest quarter than expected, but it also said customers still want to fly despite all the economy’s challenges. It predicted a bigger-than-expected profit for the second quarter.

Investors are likely to focus more on such forecasts than on the backwards-looking results of the last three months. Even though forecasts for 2023 earnings have come down a bit, “2023 consensus still looks optimistic if we are headed to a recession”, equity strategist Savita Subramanian wrote in a BofA Global Research report.

Several of the biggest banks will report their results today, offering potentially more clues. One of the fears on Wall Street is that recent turmoil in the banking system could cause a pullback in lending, which in turn could weaken the economy. The Fed’s staff economists see such weakness potentially causing a mild recession later this year, the central bank said on Wednesday.

BOND MARKET

The bond market has shown much more worry about a possible recession than the stock market, with traders betting the Fed will have to cut interest rates later this year in order to prop up the economy.

Treasury yields fell immediately after yesterday’s weaker-than-expected reports, before paring their losses through the morning. The yield on the 10-year Treasury was holding steady at 3.40 per cent. It helps set rates for mortgages and other important loans.

The two-year yield, which moves more on expectations for the Fed, slipped to 3.94 per cent from 3.97 per cent late Wednesday.

Strategists at Goldman Sachs are more optimistic about the economy’s prospects than many, forecasting only a 35 per cent probability of a recession. But they also say prices in markets available now may mean not much upside is left.

The bond market may be looking for cuts to rates, but the Fed may have less room to lower them, given how strong the job market is. Profit margins may also have little room to rise further, which would hamper stocks.

That leaves the possibility for further returns from stocks and bonds to be “not as stellar as one might expect”, Jan Hatzius, Goldman Sachs’ chief economist and head of global investment research, said in a report.