Stock Market Today: Inflation Surges, Dow Slumps, Disney Gains

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The stock market was down Thursday after January’s inflation reading came in hotter than expected, raising the specter of even faster Federal Reserve rate hikes.

In midday trading, the

Dow Jones Industrial Average
fell 75 points, or 0.2%, after the index rose 305 points Wednesday. The

S&P 500
was off 0.3%, while the

Nasdaq Composite
was down 0.2%.

“Investors came into today’s data release unable to imagine how an upside surprise to a consensus forecast of 7.3% could come about,” wrote Seema Shah, chief strategist at Principal Global Investors. “This is a big number for equities to digest.”

The consumer-price index rose 7.5% year-over-year in January, beating expectations of 7.2% and accelerating from the 7% result for December. The core consumer-price index, which strips out the more volatile food and energy prices, rose 6%, above estimates of 5.9%.

That is not what the stock market wanted to see. Investors were hoping that the report would give an indication that the rate of inflation has peaked and will slow down. Lower inflation could mean that the Fed will lift interest rates at a slower pace than feared, as the central bank is expected to increase rates for the first time in March.

“Inflation and central banks’ response to it remain front and [center] in investors’ minds, ”wrote Craig Erlam, senior market analyst at Oanda.

The bond market, meanwhile, was reflecting more rate hikes from the Federal Reserve. The 2-year Treasury yield, which tries to forecast the number of short-term rates hikes within the next couple of years, rose to 1.49% from 1.36% just before the inflation print. The 10-year Treasury yield jumped to 2% from 1.93%.

That’s consistent with the recent trend in the fed funds futures market, which tries to predict the probability of coming rate hikes or cuts. That market is reflecting a 29% chance that the Fed lifts rates by 50 basis points in March, rather than the standard 25 basis points, up from a 24% probability on Wednesday.

“A hot inflation [result] has Wall Street bracing for a half-point Fed rate hike in March, with a full percentage point of hikes by July, ”wrote Edward Moya, senior market analyst at Oanda.

That caused stocks to sell off after the market had jumped to begin the week. The S&P 500 had risen almost 2% for the week coming into Thursday and 6% from the low point of a recent drawdown hit at the end of January. The fear is that higher interest rates will lessen economic demand and dent earnings growth.

Another concern for the stock market centers on valuations. Higher long-dated bond yields make future profit less valuable and many technology companies are valued on the basis of profits coming many years down the line. That’s weighing on the tech-heavy Nasdaq Thursday.

There’s a silver lining, though, in Thursday’s stock market weakness. The major indexes are trading above their lows for the day — and the decline never got that ugly. During a few days in January, the indexes would drop more than 2%, when the market was still getting a grip on the Fed’s new intended policy. Now, with the S&P 500 already down almost 5% from its all-time high — and earnings continuing to beat expectations — buyers are stepping in when stocks fall a little more than they did a few weeks ago.

“You’d think markets would be more worried about the Fed but a lot of that energy was exhausted earlier this year,” said Dave Grecsek, managing director at Aspiriant. “I still think it’s there but the market is looking through the data a little bit. There was some buying on the dip. ”

Overseas, London’s

FTSE 100
rose 0.4%, while Tokyo’s

Nikkei 225
ended the day with gains of 0.4%.

Here are five stocks on the move Thursday:

Walt Disney (ticker: DIS) jumped 4% after the group reported better-than-expected quarterly financial results. The entertainment giant beat Wall Street’s estimates on subscriber numbers for its Disney + streaming service and its theme parks segment topped performance expectations by a wide margin.

Other entertainment stocks moved on the back of Disney’s results.

Roku (ROKU) rose 6.9%, while

Netflix (NFLX) initially rose, then fell 1.5%.

AstraZeneca (AZN) rose 3.2% after the pharmaceutical group forecast higher 2022 sales growth after reporting better-than-expected fourth-quarter profit, with revenue boosted by sales of its Covid-19 vaccine.

Credit Suisse (CS) dropped 7.4% after the Swiss bank posted a greater-than-expected loss for the final quarter of 2021. The bank also warned that it faces headwinds in 2022 due to high restructuring and compensation costs.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com and Jack Denton at jack.denton@dowjones.com