Both the Nasdaq and the S&P 500 were limping along despite a little good news on inflation. The biggest reason: Bond yields were down and the market wants them higher.
But investors were also chewing on jobless claims and the testimony of Lael Brainard, a Fed governor and the nominee for the No. 2 spot at the central bank.
By midafternoon, the tech-heavy
Nasdaq Composite
was down 1.4% and the S&P 500 was off 0.6%. . The Dow Jones Industrial Average was up 52 points, or 0.1%. All three major indexes were in the green earlier in the day.
“The market is experiencing indigestion regarding how to view inflation, what to do with price/earnings multiples, how high interest rates may rise, and importantly how quickly, as the Fed takes away the punch bowl of monetary support,” wrote Louis Navellier, founder of Navellier & Associates.
Inflation—and the scale of the Fed’s desire to rein it in—has been the driving force in the market. The consumer-price index is at its highest level since 1982.
On Thursday, though, that concern was eased a bit when the governnment released the latest producer-price index. It rose just 0.2% in December from November, below forecasts for a 0.4% increase, a sign that the pace of inflation might be slowing. Producer prices often lead consumer prices.
The uptick still brings the year-over-year increase to 9.7%, which is the highest in the history of the index. The increase in November producer prices was revised down to 0.7%, from 0.8% reported a month ago.
On the one hand, the inflation miss is a positive because it could mean that prices are moderating, which makes it less likely that the Federal Reserve will lift interest rates more times than currently expected.
“Investors are looking for signs of moderation in supply chain disruptions, as declining input costs would ultimately signal an easing of the consumer’s price burdens,” wrote John Lynch, chief investment officer for Comerica Wealth Management.
The bond market, for one, could be signaling that the recent rise in yields will slow down as inflation is near a peak. The 2-year Treasury yield, which forecasts the number of short-term rate hikes in the next couple of years, is down a tick to 0.89%. The 10-year Treasury yield is down a touch to 1.72%.
On the other hand, inflation is clearly higher in general. “Risks [are] skewed toward stronger inflation and more rapid policy rate increases,” wrote Citigroup economist Andrew Hollenhorst.
So don’t be fooled by the pause in the rise of bond yields. Many on Wall Street forecast a 10-year yield at or above 2%, which would better compensate investors for the expected long-term rate of annual inflation.
Since the 10-year yield has tended to rise in recent days from roughly its current level, the odds are that it is going higher. Instinet’s chief market technician, Frank Cappelleri, says the 2.1% target is still highly plausible.
It’s no surprise, therefore, that technology stocks are selling off. Many tech companies are valued on the expectation of large profits many years down the line, so when long-dated bond yields rise, tech valuations decline. No wonder the Dow—comprised mostly of “shorter duration” stocks—is outperforming the Nasdaq.
As for the Fed, the central bank’s Lael Brainard testified before the Senate Banking Committee on Thursday at her nomination hearing as the next vice chair of the central bank. Brainard said Wednesday that inflation was “too high” and that lowering it would be a priority.
The latest indications from Fed officials have shown the central bank on track for earlier, faster interest-rate increases, with markets now pricing in three rate increases this year and the first in March. Tighter policy ahead, and an upbeat tone from the Fed on the strength of the U.S. economy, have seen bond yields rise in early 2022, pressuring stocks.
Elsewhere, the latest weekly unemployment insurance claims figures on Thursday showed continued progress in the U.S. labor market recovery. Initial jobless claims were 230,000, slightly above consensus and up from 207,000 a week earlier. Meanwhile, continuing claims declined to 1.56 million, from 1.75 million. Economists on average had been forecasting 1.76 million continuing claims, according to FactSet.
Next up for stock market investors will be fourth-quarter earnings season, which ramps up on Friday morning as
JPMorgan Chase (ticker: JPM),
Wells Fargo (WFC), and
Citigroup (C) all report.
Wall Street consensus calls for a 20.3% year-over-year rise in S&P 500 earnings per share in the fourth quarter, according to data from Credit Suisse strategist Jonathan Golub. The fastest growth is expected to come from more cyclical sectors of the index, such as energy, materials, and industrials.
Cryptocurrencies were inching higher again Thursday, with
Bitcoin
—the leading crypto—up almost 1% over the last 24 hours, to around $44,000, according to data from CoinDesk. Smaller peer
Ethereum
was about flat, near $3,375.
Here are eight stocks on the move Thursday:
Chip group
Taiwan Semiconductor Manufacturing Co. (TSM) rose 7.2% after posting strong quarterly results. The world’s largest contract semiconductor manufacturer saw a 16.4% jump in net profit on a 21.2% spike in sales amid strong demand and tight supply.
Delta Air Lines (DAL) gained 3.2% after reporting better-than-expected earnings and revenue. Management commentary regarding spring and summer travel demand took an optimistic and upbeat tone.
KB Home (KBH) stock jumped 13% after fourth-quarter profits beat estimates and 2022 guidance impressed analysts.
Virgin Galactic (SPCE) stock tumbled 18% after the space tourism company said it plans to raise up to $500 million via a sale of convertible senior notes. It also reported preliminary fourth quarter free cash flow.
Snap (SNAP) stock fell 6.7% after Cowen analysts downgraded the stock to the equivalent of Hold, from the equivalent of Buy. They cited the stock’s pricey valuation and the potential for continued headwinds from changes
Apple (AAPL) made to its iOS operating system.
Crypto exchange Coinbase (COIN) gave up an earlier gain to trade about flat after the group said it would be acquiring FairX, a derivatives exchange.
Moderna (MRNA) declined 5.6% after announcing that the data from its vaccine trial in two- to five-year olds would be reported in March.
Boeing (BA) has risen 3.2% on reports China could reinstate the 737 Max sometime this month.
Write to Jack Denton at jack.denton@dowjones.com and Nicholas Jasinski at nicholas.jasinski@barrons.com