U.S. stocks are rising toward records Wednesday with hopes that inflation is finally heading back in the right direction after its discouraging start to the year.
The S&P 500 was 0.8% higher in midday trading and above its all-time high set at the end of March. The Nasdaq composite was adding to its own record set a day earlier, up 1%, as of 11:15 a.m. Eastern time, and the Dow Jones Industrial Average was up 250 points, or 0.6%.
Relief was coming from the bond market, where Treasury yields eased to release some of the pressure on the stock market. The moves resulted from rising expectations among traders that the Federal Reserve may indeed cut its main interest rate this year.
Stocks that tend to benefit the most from lower interest rates helped lead the market. Real-estate stocks in the S&P 500 climbed 1.5%, while utility stocks rose 1.4%. Their dividend payments look better to investors when bonds are paying less in interest.
Homebuilders were strong on hopes that cuts by the Fed would lead to easier mortgage rates, with Lennar and D.R. Horton both up at least 3.6%. Big Tech and other high-growth stocks also rode the wave of expectations for lower rates, and Nvidia’s gain of 3.4% was the strongest force pushing the S&P 500 upward.
The optimism came from a report showing U.S. consumers had to pay prices for gasoline, car insurance and everything else in April that were 3.4% higher overall than a year earlier. While that’s painful, it’s not as bad as March’s inflation rate of 3.5%.
Perhaps more importantly, the slowdown was a relief after reports for the consumer price index, or CPI, earlier this year had consistently come in worse than expected. That string of disappointing data had washed out forecasts for the Federal Reserve to soon lower its main interest rate, which is sitting at its highest level in more than two decades.
A cut in rates would goose investment prices and remove some of the downward pressure on the economy.
“There was a lot lying on today’s CPI print to prove that disinflation was simply delayed these last three months and not derailed,” according to Alexandra Wilson-Elizondo, co-chief investment officer of the multi-asset solutions business in Goldman Sachs Asset Management.
A separate report showed a stall in spending growth at U.S. retailers in April from March. It was a weaker showing than the 0.4% growth economists expected.
Slowing retail sales could be seen as a positive for markets, because it could reduce the upward pressure on inflation. But a stalling out also raises worries about cracks forming in U.S. consumer spending, which has been one of the main pillars keeping the economy out of a recession. Pressure has grown particularly high on lower-income households.
“Hopefully the consumer isn’t running out of steam, but with pandemic savings spent, rising delinquencies, slower wage growth, and now flat retail sales, a more abrupt slowing of the economy can’t be ruled out,” said Brian Jacobsen, chief economist at Annex Wealth Management.
That could threaten one of the main hopes that’s rallied the U.S. stock market toward its record levels: The Federal Reserve can pull off the balancing act of slowing the economy enough through high interest rates to snuff out high inflation but not so much that it causes a bad recession.
A separate discouraging report released in the morning, meanwhile, said manufacturing in New York state is contracting more than expected.
On Wall Street, Petco Health + Wellness was helping to lead the market after jumping 17.2%. It named Glenn Murphy, who is CEO of investment firm FIS Holdings, as its executive chairman.
On the losing end were GameStop and AMC Entertainment, as momentum reversed following their jaw-dropping starts to the week. GameStop fell 32.4% to trim its gain for the week to 87.9%.
AMC Entertainment fell 25.5% after it said it will issue nearly 23.3 million shares of its stock to exchange for $163.9 million in debt that it owes.
In the bond market, the yield on the 10-year Treasury eased to 4.36% from 4.45% late Tuesday. The two-year yield, which moves more closely with expectation for Fed action, sank to 4.74% to from 4.82%.
Traders are now forecasting a 93.3% probability that the Fed cuts its main interest rate at least once this year, according to data from CME Group. That’s up from 89.7% a day before.
In stock markets abroad, indexes were mixed. Stocks fell 0.8% in Shanghai after China’s central bank left a key lending rate unchanged.
