Stocks tick higher as hopes about the economy joust with rate fears
Stocks ticked higher on Wall Street on Wednesday as hopes for a resilient economy jousted with worries about inflation after a much stronger reading than expected on U.S. retail sales.
The S&P 500 rose 0.3% after swinging from early losses to gains through the day. The Dow Jones industrial average edged up 38 points, or 0.1%, while the Nasdaq composite rose a more forceful 0.9%.
Sales at U.S. retailers jumped more than expected last month, even as shoppers contend with higher interest rates on credit cards and other loans. The surprising strength offers hope that consumer spending — the most important part of the U.S. economy — can stay afloat despite worries about a possible recession looming. It’s the latest piece of data to show the economy remains more resilient than pessimists feared.
At the same time, though, the strong buying potentially adds more fuel to inflation, which a report earlier this week showed is cooling by less than expected. Upward pressure on inflation could force the Federal Reserve to stay more aggressive in keeping interest rates high.
High rates can drive down inflation, but they also drag on investment prices and raise the risk of recession.
Tuesday’s consumer price report shows inflationary pressures remain stubborn and are likely to keep inflation high even as its pace slows.
“Will it lead to that traditional recession or a shallow recession, or will we power through it and have more strong growth with still-high rates?” asked Tom Hainlin, national investment strategist at U.S. Bank Wealth Management. “That’s still the unknown, which is how resilient can the consumer be in this higher-for-longer” rate environment.
“It seems like both consumers and corporate America came into this in pretty good shape and so far are holding out OK,” he said.
The worries about higher rates and a firmer Fed have been most evident in the bond market, where yields on Treasury securities have jumped since a report two Fridays ago showed that the U.S. job market remains stronger than expected.
The yield on the two-year Treasury, which tends to track expectations for the Fed, briefly jumped toward 4.70% after the retail sales report, up from less than 4.60% overnight and from 4.62% late Tuesday. It then eased back to 4.60%.
The 10-year yield, which helps set rates for mortgages and other important loans, rose to 3.79% from 3.75% late Tuesday.
After Tuesday’s data on inflation came in slightly higher than expected, economists at Deutsche Bank raised their forecast for how high the Fed will take its key overnight interest rate. They now see it ultimately rising to 5.6%, up from their prior forecast of 5.1%.
The Fed has already raised its overnight rate to a range of 4.50% to 4.75%, up from virtually zero a year ago.
Mixed signals — including layoffs, strong job growth and lingering inflation — have clouded the U.S. economic outlook.
The Deutsche Bank economists said that they still expect a recession, but that the near-term strength in the economy could push its timing into the last three months of the year, later than they earlier thought.
Many other traders have also been raising their forecasts for how high the Fed will ultimately raise interest rates. They’ve also sharply reduced bets for the Fed to cut rates late this year.
Even still, stocks are hanging on to healthy gains for the year despite some recent rockiness. The S&P 500 is up 8% as strong data build hope that the economy may be able to avoid a recession. Or, if one hits, it may be only a short and shallow one.
On Wall Street, shares of Airbnb jumped 13.4% after the company reported stronger profit and revenue for its latest quarter than analysts expected. It also said trends remain encouraging into the new year, and it gave a forecast for revenue that topped Wall Street’s.
Stocks of energy producers fell 1.8% for the worst performance by far of the 11 sectors that make up the S&P 500. A barrel of U.S. crude oil slipped 0.8% to $78.39, while Brent crude, which is the international standard, fell 1.3% to $84.50.
One of the sharpest drops in the S&P 500 came from Devon Energy, which fell 10.5% after reporting weaker profit than expected for the latest quarter.
This earnings reporting season has been muted, with many companies reporting pressure on their profits from high costs and interest rates.
All told, the S&P 500 advanced 11.47 points to 4,417.60. The Dow rose 38.78 to 34,128.05, and the Nasdaq climbed 110.45 to 12,070.59.
In stock markets abroad, Turkey’s market jumped nearly 10% after trading reopened after a closure caused by the devastating earthquake in the region.
