Dow slips after data showed only slow decline in inflation in January

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U.S. stocks were mixed after January’s consumer price index data revealed a seventh straight month of slowing inflation, even as the data was slightly higher than consensus. The slow decline in inflation has investors wondering how much higher the Federal Reserve will go with interest rates.

How stocks are trading

  • The S&P 500 is up 2 points, less than 0.1%, to 4139
  • The Dow Jones Industrial Average is off 34 or 0.1%, to 34211
  • The Nasdaq Composite is up 30 points, or 0.2%, to 11922

On Monday, the Dow Jones Industrial Average rose 377 points, or 1.11%, to 34246, the S&P 500 increased 47 points, or 1.14%, to 4137, and the Nasdaq Composite gained 174 points, or 1.48%, to 11892.

The Nasdaq Composite is up 13.6% so far in 2023, but remains 25.9% off its record high touched in November 2021.

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

The good news is the inflation rate decline. The bad news is the decrease is not as sharp as hoped. But in mid-morning trading, investors are in a glass-is-half-full frame of mind.

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 a core unchanged at 0.3%.

Stock bulls want to see further signs that inflation — which hit a four-decade peak of 9.1% in June — was waning. The newest numbers are indicating that’s happening, but maybe slower than hoped.

The January inflation data and the January employment report highlight the strength of the U.S. economy even though the Federal Reserve has been raising interest rates and support the likelihood of further rate rises.

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.

After the report, 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. (Barkin is not a voting member for the Fed’s Federal Open Market Committee.)

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.

“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.

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. shares are up 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.  shares are trading higher after the hotel operator’s fourth quarter profit and revenue beat estimates. The company also offered an upbeat outlook for the first quarter.  “As we look ahead, while concerns about the macroeconomic environment persist around the world, booking trends to date remain robust and we have significant momentum in our business,” said Chief Executive Anthony Capuano. 
  • Palantir Technologies Inc. shares are sharply higher after the data software company reported its first-ever quarterly profit during 2022’s fourth quarter. 
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