Stocks Higher After Inflation Cools

NEW YORK (AP) -- Stocks are ticking higher Wednesday, and Wall Street is relaxing a bit after a report showed inflation is cooling faster than expected.

The S&P 500 was 0.2% higher in early trading. The Dow Jones Industrial Average was up 133 points, or 0.4%, at 33,818, as of 9:50 a.m. Eastern time, while the Nasdaq composite was 0.1% higher.

The main focus on Wall Street for more than a year has been high inflation and how much painful medicine the Federal Reserve will have to dole out to contain it. A report Wednesday morning showed that prices at the consumer level were 5% higher last month than a year earlier.

That's still well above the Federal Reserve's comfort level for inflation, keeping a check on financial markets. But it was better than the 5.2% that economists expected, and it marked a continued slowdown from inflation's peak last summer.

Traders are still largely betting the Fed will raise short-term interest rates by another quarter of a percentage point at its next meeting, according to data from CME Group. But they shaded some bets toward the possibility that the Fed will merely hold rates steady in May, something it has not done for more than a year.

"The Fed has every reason to take a pause and only a handful of reasons not to," said Brian Jacobsen, senior investment strategist at Allspring Global Investments.

Higher rates can undercut inflation, but only by bluntly slowing the entire economy. That raises the risk of a recession later on, while hurting prices for stocks, bonds and other investments in the meantime. The Fed has already raised rates at a furious pace over the last year, enough that it's already hurt pockets of the economy and created strains within the banking system.

That has many investors and economists expecting at least a shallow, short recession to hit the economy later this year. If banks pull back on lending as a result of all the troubles in their industry, it could tighten the vise even further on the economy.

The bond market has been showing much more nervousness about a potential recession, and traders have built bets that the Fed will have to cut interest rates later this year in order to prop up the economy.

Yields fell further Wednesday following the inflation report. The 10-year Treasury yield dropped to 3.39% from 3.43% late Tuesday. It helps set rates for mortgages and other important loans.

The two-year Treasury yield, which moves more on expectations for the Fed, fell to 3.96% from 4.03%. The stock market, meanwhile, has remained much more resilient than the bond market. It's still up for the year so far, in part on hopes the Fed can pull off the tough balancing act of slowing the economy just enough to suffocate inflation but not so much as to cause a severe recession that undercuts corporate profits.

Companies later this week will begin telling investors just how much profit they made during the first three months of the year. Expectations are almost uniformly low, with analysts forecasting the worst drop in earnings per share since the pandemic was crushing the economy in 2020. But many analysts also expect this to mark the bottom, with forecasts calling for a return to growth later this year.

Keeping a check on Wall Street Wednesday was the fact that inflation still remains high, even if it is slowing. And underneath the surface, inflation actually accelerated a bit after ignoring food and energy costs. That's something called "core inflation" and can offer a better picture of where trends are heading. And has some investors girding for the "higher for longer" interest rates that the Fed has long been warning about.

"The Fed's mandate of 2% inflation is a distant dream and interest rates have to remain somewhat restrictive till we see meaningful improvement in the trajectory of core inflation," said Gargi Chaudhuri, head of iShares Investment Strategy, Americas.