Dow advances over 250 points in choppy trade as inflation retreats, but not by as much as some had hoped

What’s driving markets

U.S. stocks wavered in choppy morning trade Thursday in the aftermath of the December CPI report which largely met expectations for a reduction in inflation. Three major indexes then trimmed their losses around midday after St. Louis Federal Reserve leader James Bullard said the probability of a soft landing has increased due to “encouraging” inflation data.

Data showed the annual rate of headline inflation retreated in December for the sixth month in a row, declining to 6.5% from 7.1% in November. This represents the lowest reading in more than a year and a significant improvement from the 40-year peak of 9.1% seen last summer.

On a month-over-month basis, headline prices actually declined by 0.1%, as economists had expected. It marked the first such decline in more than two years.

See: Inflation slows again at the end of 2022 and clears path for slower Fed rate hikes

However, market analysts said some traders had been hoping to see a more significant decline, after inflation came in lower than economists had expected during the prior two months. Core data rose 0.3% in December, which was in line with economists expectations.

“At the end of the day the market is going to say ‘what is this number’ going to mean for the Fed’ and the answer to that is the Fed is going to stay on the path that it has been outlining for many weeks,” said Bill Sterling, global strategist at GW&K Investment Management.

The data had little impact on investors’ expectations for the pace of Fed interest-rate hikes, as Fed funds futures continued to anticipate benchmark rates peaking at 5% in March, then remaining there until later in the year.

This supports the notion that the data haven’t moved the needle for the Fed, said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office, in a note to reporters.

“The market’s timid initial response may be a sign that while they acknowledge inflation is slowing, rate cuts likely aren’t on the agenda anytime soon,” Loewengart said.

Treasury yields declined after the CPI report, with the yield on the 10-year note
TMUBMUSD10Y,
3.453%
falling 3.7 basis points to 3.512%.

President Joe Biden addressed the inflation data, saying the decline was “giving families some real breathing room.”

The S&P 500 had gained 3.4% in 2023 through Wednesday partly due to investor hopes that price pressures would continue to decline, clearing the way for the Fed to cut interest-rates even more quickly than the central bank had forecast.

However, St. Louis Federal Reserve President James Bullard, said on Thursday that he still wants to get interest rates above 5% “as soon as possible” despite cooling inflation data though “tactics” of future moves don’t matter so much.

Investors also heard from Philadelphia Fed President Patrick Harker shortly after the CPI report. He backed a slowdown in the pace of rate hikes to 25 basis points at future meetings.

See also: Fed’s Harker backs pushing interest rates slightly above 5% and then pausing

Late last week, stocks cheered signs of slowing wage growth in a monthly report on the labor market released by the Department of Labor, but while wage-growth has slowed, it still has much further to fall to satisfy the Fed, Sterling said.

In addition to the inflation data, investors also parsed a weekly report on jobless claims, which showed that the pace of applications for unemployment benefits in the U.S. declined, suggesting that the Fed may need to hike rates more aggressively to achieve a slowdown in the labor market that they believe will be needed to slow inflation.

Though inflation was clearly the focus for Thursday, investors were also aware that the fourth-quarter corporate earnings reporting season kicks into gear on Friday, with big banks, including JPMorgan Chase
JPM,
+0.44%,
Citigroup
C,
+1.06%
and Bank of America
BAC,
+0.74%
presenting their results.

“The fear in the market is that we may be on the cusp of an earnings cliff, with the combined effects of softening demand resulting from the extraordinary Fed tightening and persistent cost pressures prompting management teams across many industries to provide downbeat guidance,” Zacks Research Director, Sheraz Mian, wrote in a noteThursday.

Financial sector profits are expected to fall 6.3%, according to S&P Global Market Intelligence, with earnings for the whole S&P 500 forecast to contract 2.8%.

Companies in focus

• American Airlines Group Inc.
  AAL,
  +9.34%
  shares advanced 6.5% on Thursday after the carrier said it expects stronger profit in the fourth quarter. Shares of Delta Air Lines
  DAL,
  +3.20%
  were also higher.

• Bed Bath & Beyond Inc.
  BBBY,
  +27.22%
  shares continued to climb after seeing their biggest percentage-point increase ever.

• Shares of chipmaker Taiwan Semiconductor Manufacturing Co. 
  TSM,
  +7.52%
  rose 8.2% despite a company warning about falling revenue and lower margins.

• Shares of UnitedHealth Group Inc.
  UNH,
  +0.49%
  gained 0.4% ahead of their fourth-quarter earnings report.

—Jamie Chisholm contributed to this article.