Market Snapshot: U.S. stocks end higher, with Nasdaq up for 5th day, as inflation slows

What drove markets

U.S. stocks finished higher in choppy trade Thursday in the aftermath of the December CPI report which largely met expectations for a reduction in inflation.

The three major stock indexes opened modestly lower but pushed higher around midday after St. Louis Federal Reserve Bank President James Bullard said the probability of a soft landing for the economy has increased due to “encouraging” inflation data.

The annual rate of headline inflation retreated in December for the sixth month in a row, declining to 6.5% from 7.1% in November, the lowest reading in more than a year and a significant improvement from the 40-year peak of 9.1% seen last summer. On a month-over-month basis, headline prices actually declined by 0.1%, as economists had expected, the first such decline in more than two years. Core inflation rose 0.3% in December, in line with economists expectations.

See:This key inflation gauge is still flashing warning signs for the economy

However, market analysts said some traders had been hoping to see a more significant decline, after inflation came in lower than economists had expected during the prior two months.

“The release is a little underwhelming,” said Seema Shah, chief global strategist at Principal Asset Management. “Not only are the numbers exactly in line with consensus expectations, but they don’t really clear up the 25bps vs 50bps question for the Fed’s February meeting and add nothing to the late-2023 Fed pivot debate either.”

Fed-funds futures traders further increased bets on a 25 basis point, or quarter-point, rise in the Fed’s policy interest rate in February, after Philadelphia Fed President Patrick Harker said quarter-point moves would likely be appropriate going forward. Fed-funds futures now reflect a 96.2% probability of a 25-basis point rise in February, up from around 77% on Wednesday, according to CME FedWatch Tool.

See: Traders overwhelmingly expect 25 basis point February rate hike

Tim Courtney, chief investment officer of Exencial Wealth Advisors, contends that the stock market over the past week has anticipated the slowdown in inflation and investors have been right to start the market on a positive note so far in 2023.

However, he told MarketWatch that he still thinks there are “enough problems” to keep inflation elevated for “several more quarters” as investors deal with “distortions” in different parts of the economy.

Treasury yields declined after the CPI report, with the yield on the 10-year note
TMUBMUSD10Y,
3.446%
falling 10.7 basis points to 3.446%.

St. Louis Federal Reserve President James Bullard, also said on Thursday that he still wants to get interest rates above 5% “as soon as possible” despite cooling inflation data though the “tactics” of future moves don’t matter so much.

See also: Fed’s Bullard favors getting interest rates above 5%, but said the pace is not a critical issue

In addition to the inflation data, investors parsed a weekly report on jobless claims, which showed that the pace of applications for unemployment benefits in the U.S. declined, suggesting that the Fed may need to hike interest rates further to achieve the slowdown in the labor market that they believe will be needed to slow inflation.

Though inflation was clearly the focus for Thursday, investors were also aware that the fourth-quarter corporate earnings reporting season kicks into gear on Friday, with big banks, including JPMorgan Chase
JPM,
-0.10%,
Citigroup
C,
+0.78%
and Bank of America
BAC,
+0.26%
presenting their results. Shares of bank stocks were little changed on Thursday.

“The fear in the market is that we may be on the cusp of an earnings cliff, with the combined effects of softening demand resulting from the extraordinary Fed tightening and persistent cost pressures prompting management teams across many industries to provide downbeat guidance,” Zacks Research Director, Sheraz Mian, wrote in a note Thursday.

Financial sector profits are expected to fall 6.3%, according to S&P Global Market Intelligence, with earnings for the whole S&P 500 forecast to contract 2.8%.

See: Why earnings season could be a ‘market-moving event’

Companies in focus

• American Airlines Group Inc.
  AAL,
  +9.71%
  shares finished 9.7% higher on Thursday after the carrier said it expects stronger profit in the fourth quarter. Shares of Delta Air Lines
  DAL,
  +3.72%
  were also higher.

• Bed Bath & Beyond Inc.
  BBBY,
  +50.14%
  shares climbed 50.1% after seeing their biggest percentage-point increase ever.

• Shares of chipmaker Taiwan Semiconductor Manufacturing Co. 
  TSM,
  +6.38%
  rose 6.4% despite a company warning about falling revenue and lower margins.

• Shares of Walt Disney Company
  DIS,
  +3.61%
  rose 3.6% after the company announced Mark Parker, the executive chairman of Nike, as its new chairman. 

—Jamie Chisholm contributed to this article.