Investors cheered by another sign U.S. inflation is easing
Investors are taking encouragement from another economic signal showing that inflation is cooling.
An index that measures the price sellers get for their goods and services fell 0.5% in July, the Labor Department said Thursday. That marks the first decline in the Producer Price Index since April 2020, as COVID-19 was spreading across the U.S. The data follows a government report on Wednesday that showed consumer prices also eased in July.
Inflation is still painfully high, of course, and the economy has given false signals before that relief was on the way only for the rug to get pulled out from underneath investors. Some Federal Reserve officials also made comments after Wednesday's inflation report suggesting their battle against rising prices is far from over.
"A potential peak in annual inflation measures is a welcome sign for consumers, businesses and the [Federal Open Market Committee], but historically elevated price dynamics churning in the economy will likely persist through the end of the year," Mahir Rasheed, U.S. economist with Oxford Economics, said in a report.
But enough hope for a peak in inflation and Fed aggressiveness has built that the S&P 500 has roughly halved its losses from earlier in the year, and it's up more than 15% from its bottom in mid-June.
"Healthy deceleration"
Evidence that inflation is slowing could alleviate concerns that the U.S. is on the cusp of a recession. Goldman Sachs analyst Manuel Abacasis said in a research note that current economic data suggests "the economy is experiencing a healthy deceleration, not a recession."
In afternoon trading the S&P 500 was up 13 points, or 0.3%, to 4,223, with roughly four out of five stocks on the index rising. The Dow Jones Industrial Average rose 0.4%, while the tech-heavy Nasdaq Composite lost 0.2%.
Cryptocurrencies also climbed in another echo of Wednesday's trading, when relief flowed through markets following a cooler-than-expected reading on inflation at the consumer level. But the day's movements were generally more modest than Wednesday's.
Technology stocks and other investments which were beaten down the most by aggressive Fed hikes earlier in the year have been among the strongest, and the Nasdaq has climbed more than 20% from its low in June.
The Walt Disney Co. jumped 5.8% after the entertainment company reported stronger profits for its latest quarter than analysts expected. It cited strong performance at its U.S. theme parks and announced price increases for its streaming services.
Companies whose profits most depend on a strong economy were generally helping to lead the way. Energy stocks as a group rose 3.6% for the biggest gain among the 11 sectors that make up the S&P 500. They were benefiting from rising prices of oil and natural gas. Shares of raw-material producers in the index gained 1.3%, and financial companies rose 1.2%.
Wall Street expects slower Fed tightening
Worries about a possible recession still loom over the market, as the Fed continues to raise interest rates to fight inflation. Such increases slow the economy by design, and some parts of the economy have already weakened under their weight, particularly the housing industry. But a resilient jobs market has offered a strong counterweight, leading to a muddied outlook for the economy.
A report on Thursday showed fewer U.S. workers filed for jobless claims last week than expected, a potentially encouraging sign in terms of layoffs. But it was nevertheless the highest number since November.
Traders are now betting on the Fed to raise overnight interest rates by half a percentage point at its meeting next month. That's down from the hike of 0.75 percentage points they were forecasting before Wednesday's stunner of a report on inflation at the consumer level.
The Fed's last two increases were by 0.75 points, accelerating from its two earlier hikes of the year, as the central bank upped its fight against high inflation. Even if the Fed can manage to slow the economy enough to stamp out inflation without causing a recession, higher interest rates pull downward on prices for all kinds of investments regardless.