Markets: News  

By Isabel Wang and Andrew Keshner

Traders eye inflation data on Thursday, big banks kicking off earnings Friday

U.S. stocks finished higher on Tuesday, shaking off earlier losses to extend the new year's rally ahead of Thursday's December consumer price inflation data and the kick off of the corporate earnings reporting season later this week.

How stocks traded

On Monday, the Dow Jones Industrial Average fell 113 points, or 0.34%, to 33518, the S&P 500 declined 3 points, or 0.08%, to 3892, and the Nasdaq Composite gained 66 points, or 0.63%, to 10636.

What drove markets

After seeing a three-week intraday high on Monday, investor sentiment continues to be dominated by expectations of tighter Federal Reserve monetary policy, but if traders were hoping for more clues about what's next for a key interest rate from Federal Reserve Chair Jerome Powell on Tuesday, they didn't get it.

Speaking at an international symposium in Sweden, Powell emphasized the importance of central bank independence.

"Restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy," Powell said in prepared remarks that emphasized the Fed is not "a climate-policy maker."

However, Powell didn't broach interest rate policy or the outlook for economy. He was "essentially silent" on the topics in his Tuesday remarks, said Bill Adams, Comerica Bank's chief economist.

"His choice might reflect this awareness the economy is changing rapidly," which makes it tough to nail down what's next for interest rates, said Adams. The economy keeps offering more slowing signs, backed by more data Tuesday, Adams said.

Friday and Monday's early gains in the three major U.S. stock indexes were wiped out after two Fed officials, San Francisco Fed President Mary Daly and Atlanta Fed President Raphael Bostic, said they thought the central bank will need to raise interest rates above 5%.

Andrew Hollenhorst, chief US economist at Citi, said neither of the Fed officials would be pinned down on whether the pace of interest rates should rise by 25 basis points or 50 basis points at the Fed's next policy meeting, which concludes February 1. Daly, echoing Powell lately, emphasized that instead what matters should be the "destination," or the terminal rate, of above 5%.

"However, the reality is that markets will not treat pace and destination as uncorrelated: a slowdown to 25bp in February will serve to increase market perceptions that a pause is imminent, perhaps at a rate below 5%," wrote Hollenhorst in a Tuesday note.

Federal Reserve Governor Michelle Bowman also said Tuesday she expects more interest rate hikes ahead, and she sees elevated rates holding until there are "compelling signs that inflation has peaked and for more consistent indications that inflation is on a downward path" before easing up on the monetary policy.

Fed officials have pushed back against market expectations that it would start trimming borrowing costs later this year. Hopes for shift in policy were bolstered by a December labor market report last week that showed wage inflation slowing.

"There's been a huge increase in rates in a very short period of time, and there is a lag on monetary policy. I think the Fed officials do understand that we haven't really seen the effects of much of the tightening in the real economy," said Rhys Williams, chief strategist at Spouting Rock Asset Management. "My guess is they will raise 25 basis points and talk tough and talk hawkish."

Fed funds futures traders now see a 78% likelihood of a 25 basis point hike at its upcoming policy meeting, and a 68% chance of another in March, which would bring the terminal rate to 4.75-5% by mid-year, according to the CME FedWatch tool.

On the economic data front, wholesale inventories numbers on Tuesday showed inventories climbing 1% in November as companies filled inventory ahead of the holidays. Meanwhile, sales fell 0.6%. A gauge on small business optimism in December also dropped lower than economists expected.

Meanwhile, Jamie Dimon, CEO of JPMorgan Chase & Co., (JPM) on Tuesday walked back his worries of an economic "hurricane," saying the megabank on Wall Street continues to hire despite layoffs in the sector.

A monthly update of the U.S. consumer-price index report is due Thursday, and Friday brings the start of the fourth quarter company earnings season.

Companies in focus

--Jamie Chisholm contributed to this article.

-Isabel Wang

(END) Dow Jones Newswires

January 10, 2023 16:20 ET (21:20 GMT)

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