Stocks on Wall Street are ticking higher Thursday following the latest sign that inflation is continuing to cool.
The Standard & Poor’s 500 was 0.3% higher in early trading after a report showed inflation at the wholesale level slowed last month by more than expected. The Dow Jones industrial average was up 5 points, or less than 0.1%, at 33,52, as of 9:45 a.m. Eastern time, while the Nasdaq composite was 0.8% higher.
Thursday’s report showed that prices paid by producers last month were 2.7% higher than a year earlier, the lowest inflation level for them in more than two years. The hope on Wall Street is that easing inflation on the wholesale level will not only support profits for companies, but also flow through to cooler inflation for consumers. A day earlier, a separate report said inflation for consumers slowed to 5%.
High inflation and the interest rate hikes imposed by the Federal Reserve to tame it have been at the center of Wall Street’s struggles for more than a year. The Fed‘s rate hikes over the last year have already slowed parts of the economy and exposed strains in the banking system.
A separate report Thursday said slightly more workers than expected applied for unemployment benefits last week, though the job market has remained remarkably resilient. That plus the inflation data pushed traders to shade some bets toward the Fed holding rates steady in May, though the majority still expect another hike of a quarter-percentage point.
The Fed has hiked rates at every one of its meetings since early last year. High rates can smother inflation by slowing the entire economy, but also raise the risk of a recession and hurting prices for investments.
High interest rates and inflation are restraining corporate profits. Expectations are low as companies this week begin reporting first-quarter results, with forecasts calling for the sharpest drop in earnings since the pandemic was pummeling the economy in 2020.
Delta Air Lines was down 1% after flipping between gains and losses at the open of trading. It reported weaker results than expected for the latest quarter, but predicted a bigger-than-expected profit for the second quarter.
Investors are likely to focus more on such forecasts than on the backward-looking results of the last three months. Even though forecasts for 2023 earnings have come down a bit, “2023 consensus still looks optimistic if we are headed to a recession,” equity strategist Savita Subramanian wrote in a BofA Global Research report.
The bond market has shown much more worry about a possible recession than the stock market, with traders betting heavily on the Fed having to cut interest rates later this year in order to prop up the economy.
Treasury yields fell further following Thursday’s weaker-than-expected reports. The yield on the 10-year Treasury fell to 3.37% from 3.40% late Wednesday. It helps set rates for mortgages and other important loans.
The two-year yield, which moves more on expectations for the Fed, fell to 3.90% from 3.97%.
Strategists at Goldman Sachs are more optimistic about the economy’s prospects than many, forecasting only a 35% probability of a recession. But they also say prices in markets available now may mean not much upside is left.
The bond market may be looking for rate cuts, but the Fed may have less room to lower them given how strong the job market is. Profit margins may also have little room to rise further, which would hamper stocks.
That leaves the possibility for further returns from stocks and bonds “not as stellar as one might expect,” Jan Hatzius, Goldman Sachs’ chief economist and head of global investment research, said in a report.
AP writers Joe McDonald and Matt Ott contributed to this report.
