Dow surges after inflation cools more than expected

Traders work on the floor of the New York Stock Exchange on Tuesday, December 13, in New York City.

US stocks closed higher Tuesday as investors celebrated lighter-than-expected inflation data the day before a key Federal Reserve policy decision.

Stocks surged after inflation came in at its lowest level since December of last year. Prices in November rose 7.1% annually, according to the Bureau of Labor Statistics’ closely watched Consumer Price Index. That’s down from 7.7% in October and below economists’ expectations of 7.3%. On a month-to-month basis, prices rose by 0.1% last month, as compared to October’s reading of 0.4%.

The news comes ahead of the Federal Reserve’s highly anticipated rate hike decision at the conclusion of its two-day policy meeting Wednesday. The report will be a key consideration as central bank officials continue their fight against persistently high inflation.

Traders are pricing in a half-point rate increase, down slightly from the last four three-quarter point hikes. It would be the seventh rate hike in 2022.

The Dow closed up 104 points, or 0.3%, on Tuesday.

The S&P 500 grew 0.7%. 

The Nasdaq Composite was 1% higher.

Bitcoin may be rallying Tuesday. But that’s not helping investors in struggling crypto investment and brokerage firm Coinbase. Shares of Coinbase (COIN) fell 8% Tuesday, hitting a new 52-week low in the process.

Its shares are now down 85% this year. Wall Street analysts have mixed thoughts on what’s next for the company, which competes with bankrupt FTX. Eleven analysts have rated Coinbase as a “buy” while thirteen recommend a lukewarm “hold” on it and five have an outright “sell” on the stock.

But Ark Invest, the firm run by tech and momentum stock champion Cathie Wood, has recently bought additional shares of Coinbase in her Ark Innovation fund. Of course, Wood’s star power on Wall Street has dimmed this year as Coinbase and other top investments such as Zoom (ZM), Tesla (TSLA) and Roku (ROKU) have soured. Ark Innovation (ARKK) has plummeted 62% in 2022.

The implosion of erstwhile crypto unicorn FTX and arrest of its founder Sam Bankman-Fried is not the best PR for cryptocurrencies. But investors appear to be betting that the worst could soon be over for bitcoin after a brutal year.

Bitcoin prices actually rose about 4% to nearly $18,000 earlier Tuesday. That’s the highest price for the world’s most valuable crypto since early November.

Some experts are hoping that the FTX fiasco will ultimately lead to a more stable and mature industry. Digital currencies aren’t necessarily going away.

“Whilst this will continue to trigger volatility and price dips, the scrutiny will act as a shake-out of bad actors,” said Nigel Green, CEO of deVere Group, a fintech advisory firm in a report.

“Ultimately, what’s happened this year…will push fit and proper industry leaders and financial watchdogs to seize this moment as a point of inflection and to work together in order to further shore up the sector and instill trust and transparency by means of sensible, workable regulation,” Green added.

It may take time for investors to come back to crypto though. Many are naturally feeling burned by the plunge in bitcoin’s price and the bankruptcy of FTX, not to mention other crypto firms such as Celsius, BlockFi and Voyager Digital.

“Leverage, volatility, and interest have faded as investors battle with declining prices,” said analysts at Citi Research in a report Tuesday. ” Bitcoin is down about 60% this year.

“A key focus for 2023 is whether…investors, both retail and institutional, slowly regain trust.” 

Traders work on the floor of the New York Stock Exchange on Tuesday.

Stocks hit their lows of the day in midday trading. The Dow gave up all of its gains from earlier in the morning and was down 0.1%. The S&P 500 and Nasdaq, which both surged at the opening bell, were up just 0.3% and 0.4%.

There was no clear catalyst for the pullback. But it seems that investor enthusiasm about the government’s latest report on consumer prices is being replaced by a return of the unease that Wall Street has about the likelihood of more (albeit smaller) interest rate hikes coming from the Federal Reserve on Wednesday and throughout 2023.

Wall Street is nervous that the Fed’s tightening (keep in mind that it has already lifted rates from near zero at the start of 2022 to their current range of 3.75% to 4%) will eventually slow the economy…and may even tip it into recession. The housing market has already been hit hard by soaring mortgage rates.

CPI inflation may be at its lowest level since December of last year, but it still remains historically – and painfully – high.

November’s 7.1% annual rate means the typical American household needs to shell out $396 more per month to buy the same goods and services as they did a year before, according to Moody’s Analytics.

While that nearly $400 extra needed per month isn’t as bad as the $493 needed per month when inflation soared to 9.1% in June, the high prices are still wearing down Americans and their finances.

“The November CPI print provides further reassurance that the worst of the current inflationary bout may be over; however, the Federal Reserve is still not off the hook,” Bernard Yaros, a Moody’s Analytics economist, said in a statement.

Moody’s is expecting the Fed to announce a half-point interest rate increase tomorrow at the conclusion of its meeting and follow that up with quarter-point increases in January and March.

Used cars sit on lot at a dealership in Queens, New York, in January.

The Consumer Price Index report delivered a bit of holiday cheer on Tuesday, showing that the slowdown in prices has spread across all goods and services.

“It’s hard not to be encouraged by this,” Mark Zandi, chief economist at Moody’s Analytics, told CNN’s Kate Bolduan Tuesday morning after the CPI report was released.

Here’s where that price improvement shows up, on a monthly and annual basis:

Energy: Prices are down 1.6% from October; annual increase of 13.1% (lowest since February 2021).

Used cars and trucks: Prices are down 2.9% from October; annual decrease of 3.3% (lowest annual rate since September 2017).

New vehicles: Monthly rate of price increases declined to 0% in October; prices up 7.2% annually (lowest since July 2021).

Airline fares: Prices down 3% from October; annually, however, prices are up 36% from November 2021 (smallest annual increase since August 2022)

Services less energy: November’s 0.4% monthly increase is the lowest monthly increase since July.

Food: November’s 0.5% increase is the lowest monthly rate since December 2021; annually, prices are up 10.6% (lowest increase since June 2022)

Wall Street was in slightly less of a euphoric mood as lunchtime approached. (Maybe traders need some calories to get their blood sugar…and stock prices…back up?)

The market was still solidly green for the day as of late Tuesday morning. But stocks were off their highs after surging at the open thanks to the latest read on inflation.

Health care stocks were notable laggards. UnitedHealth (UNH) and biotech Amgen (AMGN) were the biggest losers in the Dow. Amgen was also the only Dow stock to fall on Monday, dipping after announcing a nearly $28 billion acquisition of drug maker Horizon Therapeutics (HZNP).

The Dow was up nearly 275 points, or 0.8%, after soaring about 700 points after the open.

The S&P 500 gained 1.6%. 

The Nasdaq Composite rose 2.2%.

Wall Street cheered the latest data on inflation.

Big tech stocks, including Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Google owner Alphabet (GOOGL) and Facebook parent Meta Platforms (META) enjoyed particularly notable gains. But one leader of the Nasdaq was absent from the market party: Elon Musk’s Tesla.

Shares of Tesla (TSLA) fell more than 2% Tuesday, hitting a new 52-week low in the process.

Tesla’s stock has now plunged more than 50% this year. Is the fact that Musk seems to be spending a lot of time focusing on Twitter, his new $44 billion social media toy, a problem?

“Clearly, [Tesla’s] share price performance has been hurt by the incessant noise surrounding Twitter since Elon Musk completed his acquisition in late October,” said CFRA Research analyst Garrett Nelson in a recent report.

Nelson nonetheless has a “strong buy” on Tesla, noting in particular that he thinks worries that Musk will have to sell more Tesla shares to help Twitter are overblown.

But Dan Ives of Wedbush, who has been critical of Musk since the Twitter deal closed, is still expressing concerns. He said in a report in late November that “the Twitter circus show continues to go on with Musk laser focused on turning around this troubled platform while creating controversy on a daily basis.”

Ives added that “the PR Twilight Zone of Twitter happens for the world to see and advertisers remain at bay while the Musk wild card of content moderation is front and center.” Musk’s penchant for controversial (and potentially alienating) tweets aren’t helping.

That’s not good news for Twitter or Tesla. Ives said there are legitimate worries about “brand deterioration of Musk associated with Tesla.”

It’s too soon to know if consumers will start to shun Tesla’s cars because they don’t like what the CEO says on Twitter.

But Ives thinks investors are obviously worried. “At the end of the day, Musk is Tesla and Tesla is Musk,” he said.

A shopper passes frozen turkeys inside a grocery store in New York on November 14.

Once again, food inflation is outpacing overall inflation. 

A number of pantry and refrigerator staples continued to get more expensive last month, the latest CPI report shows. Eggs, which have been affected by the deadly avian flu, were a staggering 49.1% more expensive through November, and butter prices, hit by a contraction in the milk supply, shot up 27%. 

Flour prices jumped 24.9%, bread went up 15.7%, milk was 14.7% more expensive and coffee prices rose 14.6%. Chicken was up 12%, fruits and vegetables spiked 9.7%.

There were some items that got cheaper over the course of the year, particularly in the meat aisle. 

Uncooked beef roasts fell 8.1%, and uncooked beef steaks dropped 7.4%. Pork roasts, steaks and ribs slipped 5.1%, and bacon ticked down 1.1%. 

Food prices are affected by a number of factors, including extreme weather, diseases impacting crops and livestock, supply chain complications and geopolitical unrest including the war in Ukraine. That makes it more difficult for the US government to use tactics like raising interest rates to moderate food prices. 

President Joe Biden speaks to the press during a trip to Indonesia on November 16.

As the Biden administration prepares to celebrate history on the South Lawn, inside the White House the biggest news of the day is already reverberating. The Consumer Price Index data provided the latest evidence is inflation is cooling, with clear positive signs on both a year over year and month over month basis. 

President Joe Biden during a White House speech Tuesday morning called the latest data “welcome news,” expressing cautious optimism that the administration’s most significant economic problem is starting to show tangible signs of easing.

The numbers, Biden said, provide “reason for some optimism for the holiday season and, I would argue, the year ahead.” Still, the president conceded that prices “are still too high” and suggested it will “still take time” to get levels back to normal.

But Biden pointed to lower gas and food prices as a signal that the economy is “headed in the right direction.”

Biden acknowledged that it will “take time to get inflation back to normal levels” as he warned there could be “setbacks along the way.” And the president later told reporters he hopes prices will stabilize “by the end of next year,” but warned, “I can’t make that prediction.” However, he still asserted that he is “convinced [prices are] not going to go up” any further.

White House officials acknowledge there is still a long road ahead – and inflation still remains historically quite high. But the new data follows a string of positive economic news and comes the same day the Federal Reserve is expected to trigger more rate hikes, marking a strong data-point that sweeping price increases are starting to decelerate on a concrete basis. 

Especially encouraging for White House officials: the November CPI report released on Tuesday marked the fifth consecutive month of declining US inflation.  

This comes as officials in recent weeks have been encouraged by several areas where they see prices moderating, including gas, car and airline prices. While no White House official will publicly say that they believe inflation has peaked, taken together with other signs of economic progress, including continued strength in the labor market and strong GDP growth, the White House believes there is reason for the current mood of cautious optimism to hold.

US stocks soared Tuesday morning after a closely watched inflation report showed that consumer prices rose 7.1% over the past 12 months, a lower-than-expected pace of inflation. The hope is that cooling inflation pressures will lead the Federal Reserve to raise interest rates less aggressively on Wednesday…and beyond.

The Dow surged about 685 points, or 2%, shortly after the opening bell.

The S&P 500 was up 2.6%. 

The Nasdaq Composite rose 3.6%.

A person shops at a grocery store in Washington, DC, on November 3. 

Inflation in November rose 7.1% annually, down from 7.7% in October, according to the Bureau of Labor Statistics’ closely watched Consumer Price Index.

November’s rate, which landed below economists’ expectations of 7.3%, was the lowest since December 2021.

On a month-to-month basis, prices rose by 0.1% last month, as compared to October’s reading of 0.4%.

Core CPI, which excludes the volatile food and energy categories, measured 6% for the year ended in November, down from the 6.3% rate in October. On a monthly basis, core CPI increased by 0.2%.

Stocks were already heading for a solidly higher open before the widely anticipated Consumer Price Index report came out Tuesday morning. But market futures exploded higher after the US government said that prices rose “just” 7.1% from a year ago, a bigger slowdown in inflation than expected.

Dow futures popped more than 750 points, or 2.3%. S&P 500 and Nasdaq futures skyrocketed 2.5% and 3% respectively.

The New York Stock Exchange during morning trading on December 6.

US stock futures were higher ahead of a key inflation report, which comes a day before the Fed is expected to tap the brakes on rate hikes by raising its key interest rate by a half point.

The CPI report at 8:30 am is expected to show the pace of inflation fell but remained uncomfortably high. Depending on whether the report beats or misses expectations, markets could go haywire because of high expectations the Fed could ease up on the gas by hiking rates just a half point Wednesday.

Dow futures were up 100 points, or 0.3%. S&P 500 futures rose 0.3%, and Nasdaq Composite futures were 0.4% higher. 

Fear & Greed Index: 58 = Neutral

Oil & gas: US oil rose 1.1% to just over $74 a barrel. Average US gas prices fell to $3.25 a gallon. 

“Central banks will continue their aggressive tightening cycle into early 2023 before pausing as inflation falls and job losses mount,” said mutual fund giant Vanguard in a report Monday. “Most central banks will be reluctant to cut rates in 2023 given the need to cool wage growth.”

It has all given the equity and fixed markets a jolt.

Stocks rallied sharply in October and November due to hopes that the Fed would begin to scale back on the size of its rate hikes. They are still down sharply for the year, though, and stocks have been more volatile so far in December.

Long-term bond yields have eased as well, with the yield on the 10-year US Treasury edging back down to about 3.5% after moving above 4.3% in late October. That was the highest the 10-year has been since 2008.

Even though many of these central banks are expected to follow the Fed’s lead and just boost rates by a half point, or 50 basis points, investors are concerned that policy makers around the globe may not be able to prevent an economic downturn in 2023.

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Traders work on the floor of the New York Stock Exchange on December 7.

The holidays are meant to be the most wonderful time of the year. But for investors, this week just might be the most stressful time of the year.

On the consumer front, two key economic reports — the Consumer Price Index read on inflation and retail sales — come out Tuesday and Thursday. Those numbers will give more clues about the health of American consumers. Are they still shopping despite rampant price increases?

Then there’s the anticipated central bank meeting. Sandwiched between CPI and retail sales on Wednesday is the Federal Reserve’s latest policy committee meeting.

The Fed is likely to raise interest rates again, but the expectations are for just a half-point increase this go-around, following four consecutive hikes of three-quarters of a point.

If that weren’t enough, there’s even more central bank drama for investors to focus on, as the Bank of England and European Central Bank both meet on Thursday to decide whether or not to raise rates again to fight inflation — and six other central banks also make their policy announcements this week.

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Former CEO of FTX Sam Bankman-Fried during a hearing before the House Financial Services Committee at Rayburn House Office Building on Capitol Hill December 8, 2021 in Washington, DC. The committee held a hearing on "Digital Assets and the Future of Finance: Understanding the Challenges and Benefits of Financial Innovation in the United States."

Sam Bankman-Fried, the founder of failed crypto exchange FTX, was arrested in the Bahamas on Monday after US prosecutors filed criminal charges against him, according to a statement from the government of the Bahamas.

The Southern District of New York, which is investigating Bankman-Fried and the collapse of FTX and its sister trading firm Alameda, confirmed his arrest on Twitter.

“Earlier this evening, Bahamian authorities arrested Samuel Bankman-Fried at the request of the US government, based on a sealed indictment filed by the SDNY,” wrote US attorney Damian Williams. “We expect to move to unseal the indictment in the morning and will have more to say at that time.”

Bankman-Fried, was arrested without incident at his apartment complex shortly after 6 pm ET Monday in Nassau, and is set to appear in court Tuesday, the Royal Bahamas Police Force said in a statement.

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Shoppers at the King of Prussia Mall on December 11 in King of Prussia, Pennsylvania. 

Consumers are expecting inflation to improve in the coming months, according to new survey data from the Federal Reserve Bank of New York.

In November, consumers’ median inflation expectations for the next year and three years out were 5.2% and 3%, respectively. That’s down from October’s median expectations of 5.9% and 3.1%.

It’s the largest month-to-month drop in year-ahead inflation expectations since the Survey of Consumer Expectations launched in 2013, according to the New York Fed.

Expectations for inflation five years from now fell by 0.1 percentage points to 2.3%, according to the Fed survey.

Consumers’ expectations about inflation are being watched closely by the Fed as it engages in a long battle to bring down high prices. Higher inflation expectations could lead to an increase in workers bargaining for higher wages which, in turn, could drive pricing upward.

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