Stocks rise as inflation rises

Markets are focused on anything that could shift expectations that the Federal Reserve would hike rates as early as March. Fed Chair 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 as the economy no longer needed emergency aid.

Investors on Wednesday scrutinized data showing that the consumer price index, which measures what consumers pay for goods and services, rose 7% in December from the same month a year earlier, from 6.8% in November. That is the fastest pace in 40 years and the third consecutive month in which inflation has surpassed 6%.

However, the readings were generally in line with expectations, and the markets seemed to be following them closely.

“I think the markets believe inflation is about to peak,” said Darrell Cronk, chief investment officer for wealth and investment management at Wells Fargo.

Trading was choppy this week after a shaky start to 2022, with government bond yields rising and technology stocks falling. Investors learned last week that the central bank may raise interest rates earlier than previously expected.

When interest rates are low, investors tend to tax risky assets, such as stocks, to generate returns. When inflation accelerates and policymakers raise rates, the value of companies’ future earnings falls and investors have more alternatives to places to make money. This especially hurts technology stocks that promise future profits. The Nasdaq Composite is down 2.7% so far in 2022, while the S&P 500 is down 0.8%.

Luca Paolini, chief strategist at Pictet Asset Management, said he expects inflation to peak this quarter, but remains to be seen if higher inflation weighs on earnings in the coming earnings season.

Analysts expect earnings of 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 Thursday, while JPMorgan Chase, Wells Fargo and Citigroup are expected to report Friday.

Technology stocks led the sectors of the S&P 500 in recent trading, while the health care group lagged.

Of the individual stock, Biogen’s shares fell 7.3% after Medicare officials said they would cover its Alzheimer’s drug Aduhelm provided patients were in clinical trials and had early-stage symptoms.

Shares of Jefferies Financial Group fell 10% 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 10-year Treasury yield fell from 1.745% on Wednesday to 1.711% on Tuesday as the rally in government bond yields came to a halt. Yields and prices move inversely.

Abroad, the pan-continental Stoxx Europe 600 gained 0.6%.

Hong Kong-listed Chinese technology stocks such as JD.com and Meituan jumped Wednesday. Analysts and investors said there was no apparent 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.

Write to Caitlin Ostroff at [email protected] and Karen Langley at [email protected]