U.S. stocks open mostly higher after key inflation reading cools

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U.S. stocks opened mostly higher Thursday after the Federal Reserve’s preferred inflation gauge showed price pressures cooling somewhat in October, while reports suggested China is taking steps to relax its COVID restrictions to allow its economy to recover.

How stock indexes are trading
  • The Dow Jones Industrial Average
    DJIA,
    +0.41%

    fell 49 points or 0.1%, to 34,541.

  • The S&P 500
    SPX,
    +0.41%

    was up 13 points, or 0.3%, at 4,093.

  • The Nasdaq Composite
    COMP,
    +1.84%

    gained 32 points, or 0.3%, to 11,500.

On Wednesday, the Dow rose 737 points, or 2.2%, the S&P 500 jumped 3.1%, and the Nasdaq Composite advanced 4.4%. The Dow rose 20.4% during October and November, the biggest two-month percentage gain since July 1938, according to Dow Jones Market Data.

What’s driving markets

A key gauge of U.S. inflation, the personal-consumption expenditures index, rose a modest 0.3% in October, adding another piece of evidence that points to slowly easing price pressures. The yearly rate of inflation slowed to 6% in October from 6.2% in the prior month and a 40-year high of 7% last summer.

Moreover, core PCE rose 0.2%, instead of the 0.3% expected by economists

“Services prices are more sticky and a likely annoyance for central bankers. However, annual rent inflation is starting to ease across the country, rising only 0.4% in October, the smallest monthly increase since February,” said Jeffrey Roach, chief economist at LPL Financial, in emailed comments. “Given this inflation data, the Fed should be comfortable with a downshift in the pace of rate hikes at the upcoming meeting.”

Stocks jumped Wednesday when Federal Reserve chairman Jerome Powell made a speech that was less hawkish than expected.

The S&P 500 index surged 3.1% on Wednesday following the Fed chairman’s confirmation that a lower pace of interest rate hikes to combat inflation was more likely in coming months. It took the U.S. stock benchmark’s gains since its 2022 low in mid-October to 14.1%, after recent signs of easing price pressures had encouraged risk appetite once more.

“The general upbeat feeling since last month’s soft CPI print has carried into December after stocks surged thanks to a speech from Fed Chair Powell,” said Stephen Innes, managing partner at SPI Asset Management. “With markets increasingly predisposed to a terminal rate below 5% and inflation getting back close to target in 2024, the stock market’s rally could extend as pivot hopes should increase with interest rate risk now disproportionately skewed to the downside.”

“With so much money on the sidelines, fund managers may need to move into catch-up mode, so I suspect the market makers will position to get ahead of this flow in the new year so that the stock market dips will be shallow,” Innes added.

However, investors will be aware that the Fed’s policy trajectory remains dependent on data showing inflation continuing to slow as the economy cools. To that end traders will be keenly eyeing a batch of data over the next two sessions.

Two-year Treasury yields
TMUBMUSD02Y,
4.334%
,
which are particularly sensitive to monetary policy trends, continued to edge lower after the inflation data. The dip in yields has taken the shine off the dollar index
DXY,
-1.04%
,
off 0.3% to, its lowest since August.

Meanwhile, Mark Newton, head of technical strategy at Fundstrat, warned that the stock market may experience a pause for a while following recent gains.

“Wednesday’s strong ‘whoosh’ higher for equities and Treasurys has lifted prices along with yields to levels that are near technical targets for a possible trend reversal next week,” Newton wrote in a note to clients.

“My time target of 12/5-9 for a pause/stalling out looks to be growing increasingly near, and [the S&P 500] is growing quite close to the 4120 target that I’ve discussed in recent weeks,” he added.

Meanwhile, more Chinese cities eased antivirus restrictions and police patrolled their streets Thursday as the government tried to defuse public anger over some of the world’s most stringent COVID measures and head off more protests.

“The signals coming from China also look very positive,” said Craig Erlam, senior market analyst, at Oanda in a note. “While we shouldn’t expect a dramatic shift in policy from the leadership, particularly before the March Congress, any modest softening in its Covid-zero policy will and should be welcomed. The approach has been extremely damaging to growth and confidence and the protests highlight how public opinion towards it is changing.” Companies in focus

Companies in focus
  • Salesforce
    CRM,
    -9.62%

    fell after the business software company announced that co-CEO Bret Taylor would be stepping down January 31, leaving Chairman Marc Benioff as the sole CEO and also reported better than expected quarterly profit and revenue but projected fourth-quarter sales $900 million lower than Street expectations



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