Stock market today: Dow rides cooling inflation to end higher

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By Yasin Ebrahim

AiVIF.com -- The Dow closed higher Thursday, buoyed by data showing inflation fell for the first time since May 2020, bolstering bets on the Federal Reserve downshifting to smaller hikes at its meeting next month.

The Dow Jones Industrial Average rose 0.64%, or 216 points, the Nasdaq Composite was up  0.64%, and the S&P 500 rose 0.34%

Consumer prices fell by 0.1% in December, slightly faster than the economists’ forecast of no change. The downtick in consumer prices in December was the first since May 2020, and took the year-on-year CPI in December to 6.5% from 7.1% in November.

Core inflation, which strips out volatile food and energy prices, rose 0.3%, as expected. Core services, excluding housing, a key inflation gauge closely watched by Fed chairman Jerome Powell, came in at 0.26%, “significantly below this year's average run rate of 0.5%”, Morgan Stanley said.

The report “sets the stage for another reduction in the pace of rate hikes at the upcoming February FOMC,” Morgan Stanley said, forecasting the Fed to deliver “only one final 25bp rate hike before a pause and an eventual first rate cut in December.”

About 92% of traders expect the Fed to hike rates by 0.25% in February, according to the CME Fedwatch Tool.

Fed officials including Philadelphia Fed President Patrick Harker backed a move for a smaller 0.25% hike next month, while St. Louis Fed President James Bullard said he preferred the Fed to move and maintain rates above 5% “as soon as possible.”

Treasury yields came under pressure as bets for a sooner Fed pause gathered steam, with the 10-year Treasury yields falling below 3.5%.

Tech, led by Meta Platforms Inc (NASDAQ:META) and Microsoft Corporation (NASDAQ:MSFT), added to recent gains as Treasury yields slipped.

Energy was the biggest gainer, catching a bid on rising oil prices amid a weaker dollar and ongoing optimism on demand from China’s reopening.

Hess Corporation (NYSE:HES), APA Corporation (NASDAQ:APA), and EQT Corporation (NYSE:EQT) were among the biggest gainers in the sector.

American Airlines (NASDAQ:AAL), meanwhile, rallied more than 9% after the airline lifted its guidance on fourth-quarter revenue and profit on higher fares and pent-up demand for travel.

Walt Disney Company (NYSE:DIS) gained nearly 4% as activist activity in the entertainment company looks set to heat up, as activist investor Nelson Peltz prepares for a proxy fight to win a seat on the board after his request was rejected.

Peltz’s Trian Partners, which owns about a stake just over 0.5% in Disney, is pushing for changes at the entertainment company including better governance, cost cuts and a move to reinstate the dividend by 2025.

Banking stocks are set to dominate investor attention on the earnings front on Friday. Bank of America (NYSE:BAC), Citigroup (NYSE:C), JPMorgan (NYSE:JPM), and Wells Fargo (NYSE:WFC) will report quarterly results before the markets open Friday.

Bank stocks have risen about 5% year to date, but are still nursing losses of about 27% over the past year and are likely to continue to disappoint investors as demand for loans, particularly mortgages and auto loans, have been hurt somewhat by soaring rates.   

"Banks have disappointed and I really expect that to continue at least through this quarter," Will Rhind, founder and CEO, GraniteShares told AiVIF.com's Yasin Ebrahim in an interview on Thursday. "People perhaps made the mistake of thinking that just because interest rates were rising, that will create a more favorable environment for banks."

"On the one hand net interest margin will be favorable, but I think people have overlooked or at least don't pay as much attention to other exposures that banks have...and the loan loss provisions that are needed to increase as defaults start to creep back in the market," Rhind added. "That's happening in the weaker areas including the auto loan and mortgage market."