Wall Street Rallies After Inflation Report

NEW YORK (AP) -- Stocks are rallying Thursday as Wall Street lets out a bit of an exhale following the latest update on inflation across the U.S.

The S&P 500 was 1.1% higher in early trading and on track for just its second winning day in the last eight. The Dow Jones Industrial Average was up 366 points, or 1%, at 35,489, as of 9:50 a.m. Eastern time, and the Nasdaq composite was 1.3% higher.

Thursday's highly anticipated report showed U.S. consumers paid prices that were 3.2% higher in July than a year earlier. That's a touch milder than the 3.3% inflation rate economists expected to see and down sharply from last summer's peak above 9%. Beneath the surface, underlying trends for inflation were also within expectations.

The readings bolstered hopes among investors that the Federal Reserve's campaign to grind down inflation is progressing and that maybe it could even be done hiking interest rates. High rates undercut inflation by slowing the entire economy and hurting investment prices, which raise the risk of a recession.

Such hopes helped the S&P 500 rally a big 19.5% through the first seven months of the year, though critics say Wall Street too quickly formed a consensus that inflation is continuing to cool, the economy will avoid a recession and the Fed has already hiked rates for the final time this cycle.

The Fed has said it will make upcoming decisions on rates based on what data reports say, particularly those on inflation and the job market. Its main rate is already at its highest level in more than two decades.

Thursday's report likely gives the Fed a reason to hold rates steady at its next meeting in September, before it gets more economic data in the runup to the following meeting that ends Nov. 1, according to Gargi Chaudhuri, head of iShares Investment Strategy, Americas.

Of course, another report on inflation is looming on Friday, which will show how bad inflation was in July at the wholesale level. Then, more reports on inflation and one more on overall hiring for August will arrive before the Fed's next meeting that ends Sept. 20.

"Separating the signal from the noise, most of the components of inflation are heading in the right direction," said Brian Jacobsen, chief economists at Annex Wealth Management. He said if the trends continue, it will be tough to justify another hike to interest rates.

Treasury yields were also dipping in the bond market after a report showed slightly more workers applied for unemployment benefits last week than expected. The number remains low compared with history, signaling the job market remains remarkably resilient despite much higher interest rates.

Fed officials would likely welcome some softening of the job market, which they would see as removing upward pressure on inflation.

The weekly data on unemployment claims, though, have given head fakes in the past about the trajectory of the job market, said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office. That could mean the cuts to interest rates that investors really desire may be further off than hoped.

"The Fed may leave interest rates unchanged next month, but they're not about to start cutting them," Loewengart said.

Big U.S. companies, meanwhile, continue to report mostly better profits for the spring than analysts expected. That's usually the case, and analysts had particularly low expectations coming into this reporting season as higher costs for workers and other expenses eat into profit margins.

The Walt Disney Co. rose 1% after saying it would raise prices for some of its streaming services in hopes of boosting profitability. The entertainment giant reported stronger profit for the spring than analysts expected but weaker revenue.

Capri Holdings, which owns the Michael Kors, Versace and Jimmy Choo brands, soared 56.1% as Big Fashion continues to consolidate.

Tapestry, the company behind luxury handbag and accessories retailer Coach, said it was buying the company for roughly $8.5 billion. The deal would put it in better position to take on big European rivals, such as LVMH. Tapestry fell 9.6%.

In the bond market, the yield on the 10-year Treasury dipped to 3.99% from 4.01% late Wednesday. It helps set rates for mortgages and other important loans.

The two-year Treasury yield, which moves more on expectations for the Fed, slipped to 4.78% from 4.80%.

In stock markets abroad, indexes were higher in Europe and mixed in Asia.

Stocks in China held relatively steady after U.S. President Joe Biden signed an order to block and regulate high-tech U.S.-based investments going toward China.