S&P 500 trades near record as inflation's rise at fastest rate since 2008 seen as short-lived

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By William Watts and Mark DeCambre

U.S. stock benchmarks remained aloft on Thursday, trading at or near records, but off their best levels of the session, as investors continued to assess evidence of mounting inflation pressures in America. A report on consumer prices showed that inflation accelerating at the fastest pace in years.

The climb in stocks and fairly muted response in the bond market to consumer prices implies that investors are harboring the belief that pricing pressures won’t be sustained.

What are major benchmarks doing?

On Wednesday, stocks ended slightly lower, with the Dow falling 152.68 points, or 0.4%, to close at 34,447.14. The S&P 500 gave up a modest early gain that pushed the large-cap benchmark slightly above its previous record close of 4,232.60 set on May 7 to finish the day down 0.2%. The Nasdaq Composite closed 0.1% lower.

What’s driving the market?

U.S. stocks were record bound, shaking off a report that showed that cost of living surged in May, driving the pace of inflation to a 13-year high of 5% (link), as the economy fully reopens from the COVID pandemic.

The rate of inflation over the past year escalated to 5% from 4.2% in the prior month. That put it at the highest level since 2008, when the cost of oil hit a record $150 a barrel. Before that, the last time inflation was as high was in 1991.

The consumer-price index jumped 0.6% last month to mark the fourth increase in a row, the government said Thursday (link). Economists polled by Dow Jones and The Wall Street Journal had forecast a 0.5% advance.

Still, some investors appeared to take heart in inflation being a short-lived phenomenon, with the current reports on price increases, highlighting so-called base effects, when weaker months of inflation were phased out from yearly measures as time passed, leading to mechanically higher price levels.

Mike Loewengart, managing director investment management at E-Trade Financial said that there is a lot of latent appetite that is being released after months of COVID-related lockdowns.

“Keep in mind that as we start to make our way back to a full economic recovery, there is pent up demand and supply constraints from raw material and labor shortages,” the strategist wrote. “This creates the type of inflation that the Fed believes is transitory, meaning it too shall pass,” he added.

Not all investors were sold on the notion of a transitory bout of inflation.

James Knight, ING’s Chief International Economist, told MarketWatch that “we are at or close to the peak,” on inflation, but also said “we think the descent will be far slower and gradual than the Fed are currently anticipating based on their forecasts.”

“Headline inflation is likely to stay above 4% until early next year with core inflation likely remaining above 3%,” until the second quarter of next year. “That doesn’t strike me as especially transitory,” the economist said.

Lately, stocks have been locked mostly in narrow range near all-time highs, as investors try to gather more insight about the outlook for the economy in the aftermath of the public health crisis that hobbled the global economy.

The yield on the 10-year Treasury note on Thursday was trading around its lowest level since March, suggesting that fixed-income investors are buying into the possibility of a powerful but short-lived jump in inflation.

A hotter-than-expected jump in the April CPI briefly rattled markets last month, sparking concerns over the potential for runaway inflation and the possibility the Federal Reserve could move sooner than anticipated to slow its bond purchases.

A separate report on weekly initial jobless claims (link) fell 9,000 to 376,000 in the week ended June 5, the Labor Department said Thursday (link), marking the lowest level of claims since March 2020. Economists surveyed by The Wall Street Journal had forecast new claims to fall to a seasonally adjusted 370,000.

In Europe, the ECB on Thursday offered few surprises, keeping interest rates unchanged and leaving the size of its asset-purchase programs unchanged, (link) as expected. The ECB said it expected to continue to buy assets under its pandemic emergency purchase program, or PEPP, at a “significantly higher” pace than seen in the early months of this year.

ECB President Christine Lagarde at a news conference following the central bank’s policy update, described the risks to the outlook for economic growth in the eurozone as “broadly balanced,” a shift from the ECB’s previous assessment that risk were skewed to the downside.

The ECB upped its forecasts for economic growth and inflation for this year and 2022, but left its projections for 2023 unchanged at 1.4%.

The unchanged 2023 inflation forecast signals that the Lagarde’s ECB also sees a near-term pickup in inflation as likely to remain transitory, like many members of the Fed. The ECB boss emphasized that core inflation “far away from the ultimate aim.” Like the Fed, inflation has long undershot the ECB’s target of near but just below 2%.

Meme stocks also were in focus, after GameStop Corp.(GME) late Wednesday disclosed that the Securities and Exchange Commission had asked for its cooperation with an investigation (link) into the unprecedented volatility its stock has seen in recent months. It also suggested it isn’t the only one being probed.

Looking ahead, May U.S. federal budget figures are due at 2 p.m. Eastern.

See also:BANG stocks take a hit after GameStop discloses regulators on investigating (link)

-William Watts; 415-439-6400; AskNewswires@dowjones.com

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(END) Dow Jones Newswires

06-10-21 1237ET

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