Inflation in the US reached its fastest pace since 1982, but on Wednesday equities took the news calmly.
The high inflation rate was generally in line with expectations, and large US stock indices ended the day higher.
The S&P 500 received 13.28 points, or 0.3%, to 4726.35, down 1.5% from the record last week. The Dow Jones Industrial Average added 38.30 points, or 0.1%, to 36290.32. The technology-heavy Nasdaq Composite rose 34.94 points, or 0.2%, to 15188.39.
The markets have been focused on anything that could change expectations that the Federal Reserve will start raising interest rates as soon as March. Fed Chairman Jerome Powell on Tuesday called high inflation a “serious threat” to a full economic recovery and said the central bank was preparing to raise interest rates because the economy no longer needed emergency support.
Investors on Wednesday examined data showing the consumer price index ̵[ads1]1; which measures what consumers pay for goods and services – rose 7% in December from the same month the year before, up from 6.8% in November. It is the fastest pace in almost 40 years and the third month in a row where inflation exceeded 6%.
The markets did not seem shaky.
“I think markets think inflation is about to peak,” said Darrell Cronk, Wells Fargo’s chief investment officer.
Luca Paolini, chief strategist at Pictet Asset Management, said he expected inflation to peak this quarter, but is waiting to see if higher inflation outweighs earnings in the coming earnings season.
Trading has been choppy this week after a difficult start to 2022 which caused government interest rates to jump and technology stocks to fall. Investors were told last week that the central bank can raise interest rates faster than previously thought.
When interest rates are low, investors tend to upload risk assets as stocks to generate returns. As inflation accelerates and policy makers raise interest rates, the value of companies’ future earnings declines and investors have more options for places to make money. This particularly hurts technology stocks that promise to expand future profits. The Nasdaq Composite is down 2.9% so far in 2022, while the S&P 500 is down 0.8%.
Investors have been watching closely as the central bank prepares to raise interest rates and shrink its assets. Fed officials approved plans in December to more quickly scale down, or scale down, their asset purchases, a form of economic stimulus.
“I think the market has been well prepared at this time for the downsizing and rate hikes,” said Mace McCain, president and chief investment officer of Frost Investment Advisors. “They can once again look forward to what will be a strong earnings season.”
Analysts expect earnings from companies in the S&P 500 to rise 22% in the fourth quarter from a year earlier, according to FactSet. Delta Air Lines is expected to report on Thursday, while JPMorgan Chase, Wells Fargo and Citigroup are expected to report on Friday.
Ten of the S&P 500’s 11 sectors continued on Wednesday. Only the health service refused.
Among individual stocks, shares in Biogen fell $ 16.18, or 6.7%, to $ 225.34 after Medicare officials said they would cover the Alzheimer’s drug Aduhelm provided patients were in clinical trials and had early symptoms.
Shares in Jefferies Financial Group fell $ 3.84, or 9.3%, to $ 37.59 after the company reported lower-than-expected earnings and earnings for the last quarter. Jefferies said it was hit by challenging market conditions for fixed income trading.
The benchmark index for 10-year US government bonds fell to 1.724% on Wednesday from 1.745% on Tuesday. Interest rates fall when bond prices rise.
Abroad, the pan-continental Stoxx Europe 600 rose 0.6%.
Hong Kong-listed Chinese technology stocks such as JD.com and Meituan rose on Wednesday. Analysts and investors said there was no clear catalyst. Hong Kong’s Hang Seng Index rose 2.8% and China’s Shanghai Composite rose 0.8%.
Japan’s Nikkei 225 and South Korea’s Kospi rose 1.9% and 1.5%, respectively.
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