U.S. stocks were trimming losses on Tuesday afternoon, with the Nasdaq Composite ticking into positive territory as January’s consumer price index data revealed a seventh straight month of slowing inflation, but not as quickly as economists had expected.
How stocks are trading
The S&P 500
SPX,
+0.14%
dropped 3 points, or nearly flat at 4,133
The Dow Jones Industrial Average
DJIA,
-0.20%
was off 121 points, or 0.4%, to 34,123
The Nasdaq Composite
COMP,
+0.55%
gained 24 points, or 0.2%, to 11,917
On Monday, the Dow Jones Industrial Average rose 377 points, or 1.11%, to 34,246, the S&P 500 increased 47 points, or 1.14%, to 4,137, and the Nasdaq Composite gained 174 points, or 1.48%, to 11,892.
The Nasdaq Composite is up 13% so far in 2023, but remains roughly 25% off its record high touched in November 2021 and it’s 16% year over year.
What’s driving markets
The January consumer price index showed the cost of living rising 0.5% month over month and falling to a 6.4% yearly rate, down from 6.5% in December. The core CPI, taking away volatile food and energy prices, fell to 5.6% from 5.7% for the year.
See: CPI shows U.S. inflation still sticky in January
Economists were forecasting that the headline annual CPI inflation rate was going to drop to 6.2% year over year. The consensus was for a core reading of 5.4% on an annual basis. The month-on-month readings were expected to be up 0.4%, compared to minus 0.1% in December, and the core unchanged at 0.3%.
After the report, Dallas Federal Reserve President Lorie Logan said she expected the central bank to keep nudging the benchmark rate higher. But Logan did not want the Fed to “lock in” a peak interest rate or how to get there, she noted in a speech at Prairie View A&M University.
Also Tuesday, Richmond Federal Reserve President Tom Barkin said inflation is cooling, albeit slowly. “I think there is going to be a lot more inertia, a lot more persistence that maybe we don’t want,” Barkin said in a Bloomberg television interview.
The Fed raised the federal funds rate by 25 basis points earlier this month, bringing the benchmark rate to a range of 4.5% to 4.75%. The odds of a 25 basis point increase in May and June increased Tuesday morning, after the January inflation.
Inflation’s slow, stubborn decline has investors wondering how much higher the Federal Reserve will go with interest rates.
The disinflation of recent months has encouraged investors to hope the Federal Reserve can soon stop raising interest rates, thereby allowing the economy to avoid a sharp contraction and thus support corporate earnings. This narrative has helped lift the S&P 500 by 7.8% so far this year.
But the rosy narrative is ringing hollow in the face of stubbornly high prices, Jennifer DeSisto, chief investment officer at Anchor Capital Advisors, said in an interview.
Some investors might have been hoping for inflation to ebb away faster — something that would’ve pushed the Fed to back away from more rate hikes. “I think the market had this view that inflation would be falling faster. … This is kind of catching them off guard at this point,” DeSisto said.
“The strength of core inflation suggests that the Fed has a lot more work to do to bring inflation back to 2%,” said Maria Vassalou, Goldman Sachs Asset Management’s co-chief investment officer of Multi-Asset Solutions.
“If retail sales also show strength tomorrow, the Fed may have to increase their funds rate target to 5.5% in order to tame inflation,” Vassalou said.
U.S. January retail sales data are due out Wednesday morning and U.S. consumers are projected to spend 1.3% more month over month, according to Numerator, a consumer data analytics and tech company.
But Ellen Zentner, chief U.S. economist at Morgan Stanley, said “without worsening inflationary pressures in today’s report, the Fed will see more evidence accumulating that inflation is decelerating despite a stronger than anticipated labor market.”
Zentner expects the Fed to add another 25 basis point in May and after that, the central bank will be “largely set.” After May, “a slowing labor market and more moderate inflation outcomes should set the stage for a stop in the tightening cycle and an eventual first rate cut in December,” Zentner said.
Meanwhile, the corporate earnings reporting season is drawing to a close. With most reports in, earnings for S&P 500 index companies were down about 2.0% during the last three months of 2022, the first decline since the third quarter of 2020. Most companies beat analysts’ forecasts, but the share of negative surprises rose.
Companies in focus
Coca-Cola Co.
KO,
-1.33%
shares are down 1.4% after the beverage giant matched consensus on its fourth quarter earnings and beat revenue expectations. “Organic revenue performance was strong across operating segments and included 12% growth in price/mix and 2% growth in concentrate sales,” the company said.
Marriott International Inc.
MAR,
+3.01%
shares are trading 2.7% higher after the hotel operator’s fourth quarter profit and revenue beat estimates. The company also offered an upbeat outlook for the first quarter.
Palantir Technologies Inc.
PLTR,
+19.38%
shares rose 15.2% after the data software company reported its first-ever quarterly profit during 2022’s fourth quarter.
Shares of NVDIA Corp.
NVDA,
+5.48%
jumped 4.7% after BofA Securities said it is upbeat about the company’s ability to capitalize on the push that companies are making to bake artificial intelligence into their offerings.
— Jamie Chisholm contributed to this report
