Market Snapshot: Dow, S&P 500 end second straight day higher as investors take inflation near 40-year high in stride

U.S. stock indexes closed with modest gains Wednesday, after a reading on inflation came in near a four-decade high.

What happened in markets

The Dow Jones Industrial Average DJIA, +0.11% rose 38.30 points, or 0.1%, ending at 36,290.32.
The S&P 500 SPX, +0.28% added 13.28 points, or 0.3%, closing at 4,726.35.
The Nasdaq Composite Index COMP, +0.23% rose 34.94 points, or 0.2%, finishing at 15,188.39.

On Tuesday, all three indexes gained ground, with the Nasdaq Composite leading the way with a gain of 1.4%.

What drove markets

Stocks were buoyed Wednesday as investors exhaled with relief after the latest reading on inflation, while running hot, wasn’t worse than anticipated.

The consumer-price index posted a monthly rise of 0.5% in December, as prices rose by a near 40-year high of 7% from a year ago, while also indicating elevated U.S. inflation could persist well into 2022.

The gain in the consumer-price index exceeded the 0.4% forecast of economists polled by The Wall Street Journal. Increases were driven largely by elevated costs for food, shelter and used cars, even as energy prices briefly fell from recent highs.

A separate measure of consumer inflation that strips out volatile food and energy prices rose 0.6% last month, the government said Wednesday. That pushed the increase over the past 12 months to 5.5% from 4.9%—a 31-year high.

See: Steak and eggs are a lot more expensive: Grocery prices soar at fastest pace in 13 years

While stocks closed off the session’s best levels, Kent Engelke, chief economic strategist at Capitol Securities Management, said the market was showing signs of relief that inflation pressures didn’t overshoot expectations.

“Now the next test is will inflation pressure actually moderate,” Engelke said, in a phone interview. “I do believe it will, but I don’t think it will back off the 2% target range the market is expecting.”

“We still will have above-trend growth and above-trend inflation,” he predicted, adding that such a mix could reignite the recent sharp rotation by investors into value stocks, but away from growth.

St. Louis Fed President James Bullard said Wednesday that four interest rate increases now appear likely to be needed to tackle high inflation, in an interview with The Wall Street Journal following the latest inflation data.

Worries about runaway prices, and the Fed’s response, have helped the S&P 500/Citigroup pure value index SP500PV, -0.01% rise 5.5% this year as the S&P 500/Citigroup pure growth index SP500PG, +0.50% has retreated 5.1%.

However, climbing oil prices potentially could still add to consumer woes. “Since year-end, oil prices have jumped nearly 10%, with WTI currently sitting at $82 per barrel, suggesting that inflationary pressures from energy are likely to re-emerge,” Steve Chiavarone, Federated Hermes’ head of multiasset solutions, wrote in emailed comments Wednesday.

Investors now also are eager for a blueprint from the Federal Reserve on how it plans on reducing its balance sheet, including potentially selling assets, a tool Chairman Jerome Powell didn’t rule out Tuesday, in his confirmation hearing for a second term at the helm of the central bank.

Cleveland Fed President Loretta Mester on Wednesday said she backs the central bank shrinking its balance sheet “as fast as we can,” so long as the pace doesn’t hurt financial markets. Bullard said he favored a “passive runoff” in which the balance sheet declines as assets mature without being replaced.

Should the Fed start selling Treasurys and mortgage-backed securities, instead of letting them roll off the balance sheet, it would mark “a major change in the past 10-12 years of monetary policy,” Engelke said.

“What’s going to happen if your biggest bond buyer now becomes a seller?”

Read: As Wall Street watches yields climb, a big question emerges: What is the ‘right size’ for the Federal Reserve’s balance sheet?

In other economic news, the latest Federal Reserve Beige Book report on economic conditions showed solid growth in the ability of businesses to pass along price gains to customers in December, a departure from recent years.

Which companies were in focus?

Jefferies Inc. JEF said Wednesday its fourth-quarter net income rose 6% to $324.9 million, or $1.20 a share, from $307.3 million, or $1.11 a share in the year-ago quarter. Shares fell 9.3%.
Shares of Pfizer Inc. PFE closed 0.1% lower after the company said administering the Prevnar 20 pneumococcal disease shot at the same time as the COVID-19 vaccine and booster it developed with BioNTech SE BNTX produced the same response.
Shares of Intuitive Surgical IncISRG fell 1.5%, after the minimally invasive care company provided an upbeat fourth-quarter revenue outlook, on strength in instruments and accessories and as the COVID-19 resurgence hurt results.
Popular Inc. BPOP said Wednesday it expects to repurchase $500 million worth of its stock in 2022, and that it raised its quarterly dividend by 22%, to 55 cents a share from 45 cents. Its stock rose 0.4%.
DirecTV and Dish Network DISH, +2.80% are in fresh talks to merge after years of on-again, off-again wrangling and multiple clampdowns from federal antitrust officials, the New York Post reported. Shares of Dish advanced 2.8%.
Shares of Tesla Inc. TSLA, +3.93% were in focus, closing up 3.9%, after a teenager, calling himself a 19-year-old security specialist and hacker, said that he had hacked into the software systems of nearly two dozen Tesla electric-powered vehicles and had limited control over them.

How did other assets do?

The yield on the 10-year Treasury note TMUBMUSD10Y, 1.746% fell 2.1 basis points to 1.724%. Treasury yields and prices move in opposite directions.
The ICE U.S. Dollar Index DXY, a measure of the currency against a basket of six major rivals, was down 0.8%.
Oil futures extended gains on Wednesday, with West Texas Intermediate crude CL00 for February delivery CLG22 rising 1.8% to settle at $82.64 a barrel. Gold futures GC00 edged up 0.5% ending at $1,827.30 an ounce.
Bitcoin BTCUSD was up 2.6% at $43,920.
The Stoxx Europe 600 SXXP closed up 0.7%, while London’s FTSE 100 UKX gained 0.8%.
The Shanghai Composite SHCOMP rose 0.8%, while the Hang Seng Index HSI closed 2.8% higher and Japan’s Nikkei 225 NIK rallied 1.9%.

Steve Goldstein contributed to this article.

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