Dow ekes out gain in mixed U.S. stock market as Fed officials reiterate inflation is temporary

What’s driving the market?

The Dow Jones Industrial Average joined a global equity rally on Tuesday that pushed markets in Asia to their highest levels in a month and the Stoxx Europe 600 index to a record close.

But an early jump in U.S. stocks, which saw the S&P 500 index trade near an all-time high, lost steam as survey-based data on manufacturing activity showed that shortages of supplies and labor meant firms are struggling to fill a surge in new orders for cars, computers, furniture, appliances and all sorts of goods.

The Institute for Supply Management said its manufacturing index rose to 61.2% in May from 60.7% in April. New orders paced the rise, while production and hiring slowed. That’s a recipe for further inflation.

“The nation’s factories are humming, with strong demand for products supporting activity that would be even stronger if the resources were available to expand production,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors, in a note.

“That should improve in time as millions of unemployed Americans are incentivized to fill a flood of job openings. Even so, it will take some time for the bottlenecks in the system to be worked out. Until that is achieved, upward pressure on prices will likely continue.”

The economic recovery has raised inflation fears which helped push up Treasury yields Tuesday. Tech-related stocks, which are more sensitive to rising yields, were leading the way lower as equities weakened.

The “biggest issues out there” are whether inflation is transitory and what the Federal Reserve is going to do around tapering, according to Matthew Tuttle, chief executive officer and chief investment officer of Tuttle Capital Management.

“Until we get answers to those questions, I don’t really think you’ll see the broad market really going anywhere,” he said Tuesday in a phone interview. But “beneath the surface there’s gonna be a lot going on,” he said, including in meme stocks like AMC Entertainment Holdings
AMC,
+22.66%
and GameStop Corp.
GME,
+12.17%,
innovative technology bets, and “the growth versus value battle.”

The U.S. manufacturing data comes after China’s gauge of private-sector manufacturing activity, the Caixin/Markit Manufacturing Purchasing Managers’ Index, rose to 52, up from 51.9 in the previous month and marking the highest level since December. A reading of at least 50 indicates improving conditions.

Meanwhile, the IHS Markit/CIPS UK Manufacturing PMI rose to 65.6 in May from 60.9 in April, representing the highest reading since 1992. The eurozone jobless rate fell in April, even as COVID-19 restrictions continued leading many businesses to reduce or suspend services.

May’s mostly muted equity moves suggest that investors are coming around to the notion that inflation will be transitory and that the Federal Reserve will be patient in retracting stimulus measures that have been put in place to help support the economy amid coronavirus. Uncertainty about how inflation will play out, however, has been a source of market turbulence.

“Economic data have been erratic, and we expect more of the same as economies restart amid pent-up consumer demand and supply shortages,” wrote analysts at BlackRock, in a weekly outlook note. “We advocate looking through near-term market volatility and remain pro-risk, predicated on our belief that the Federal Reserve faces a very high bar to divert from its new policy framework to keep yields low.”

See: Tesla price increases caused by major issues sourcing critical parts, Elon Musk says

Meanwhile, COVID cases continued to decline in the U.S. as vaccination rates rise. More than 62% of adults have received at least one vaccine dose, the CDC reported Sunday. said. There were just 12,663 new cases on Saturday, according to the CDC, the lowest since March 2020.

“There is now a very good chance that real economic growth will be stronger, unemployment will be lower and inflation will be higher in the fourth quarter of 2021 than current Federal Reserve projections,” David Kelly, chief global strategist at J.P. Morgan Asset Management, said in May 31 note. “This could well force the Fed to taper bond purchases in late 2021 or early 2022 and raise the federal funds rate in late 2022 or early 2023.”

Market participants heard from two Fed speakers on Tuesday, ahead of the central bank’s media blackout period before a two-day policy meeting June 15-16.

Randal Quarles, the Fed’s vice chair for supervision, indicated Tuesday during an interview with Politico that the recent rise in inflation should prove transitory, according to a Reuters report. “Coming out of an event like this, where there are going to be different speeds at which supply chains unblock, different speeds at which different parts of the economy begin to move…you are going to see inflationary pressure…and one would expect it to be temporary,” Reuters quoted Quarles as saying.

During a speech Tuesday afternoon to the Economic Club of New York, Fed Gov. Lael Brainardalso indicated that the price surge was temporary.

“The market loves consistency,” said David Wagner, a portfolio manager at Aptus Capital Advisors, in a phone interview Tuesday. While investors may be soothed by the Fed’s consistent messaging on inflation, they’re also searching for a catalyst to push the stock market higher as it “continues to be priced for perfection,” he said.

See: Life might feel more certain this summer, but betting on a calm stock market still could go wrong

Which companies are in focus?

• Shares of Cloudera Inc. CLDR, soared almost 24% after the data management and analytics software company disclosed a deal to be acquired for $16 a share in cash by funds advised by Clayton, Dubilier & Rice LLC and Kohlberg Kravis Roberts & Co. L.P.
  KKR,
  +0.07%.

• LifeStance Health Group Inc. LFST, disclosed Tuesday that it has set terms of its initial public offering, in which the Arizona-based outpatient mental health company looks to raise up to $557.6 million and be valued at up to $6.35 billion.
• AMC Entertainment Holdings Inc. AMC disclosed Tuesday that it sold 8.5 million shares of its common stock for $230.5 million to Mudrick Capital Management L.P. The share sale deal would represent a price for AMC’s stock of $27.12 a share, which is 3.8% above Friday’s closing price of $26.12. Shares jumped about 22.7%.
• Chinese electric vehicle maker NIO NIO said May deliveries rose 95% year-over-year to 6,711 vehicles. Shares were up 9.6%.

How are other markets trading?

• The yield on the 10-year Treasury note
  TMUBMUSD10Y,
  1.613%
  edged up to 1.617% by 3 p.m. Eastern time. Yields and bond prices move in opposite directions.
• The ICE U.S. Dollar Index
  DXY,
  -0.10%,
  a measure of the currency against a basket of six major rivals, was down 0.1%.
• Oil futures
  CL00,
  +2.47%
  jumped to the highest level in more than two years as OPEC+ kept its output plans in place, with West Texas Intermediate crude for July delivery rising $1.40, or 2.1%, to settle at $67.72 a barrel. Gold futures
  GC00,
  -0.16%
  saw a modest loss, with contracts for August delivery declining 30 cents, or 0.02%, to settle at $1,905 an ounce.
• In Europe, the pan-Continental Stoxx Europe 600 index
  SXXP,
  +0.75%
  rose about 0.8% to a fresh record close, while London’s FTSE 100
  UKX,
  +0.82%
  gained 0.8%.
• In Asia, the Shanghai Composite
  SHCOMP,
  +0.26%
  rose 0.3%, while Hong Kong’s Hang Seng Index
  HSI,
  +1.08%
  jumped 1.1% and Japan’s Nikkei 225
  NIK,
  -0.16%
  fell 0.2%.

—Mark DeCambre contributed to this report