Stocks faltered as key inflation measures cooled

Fresh geopolitical tensions ended a major rally in Wall Street stocks on Tuesday, as investors assessed reports that Russian missiles had entered Poland.

The S&P 500 (^GSPC) pared early morning gains and ticked slightly higher by 0.2% during midday trade, while the Dow Jones Industrial Average (^DJI) was down 0.2%. The tech-heavy Nasdaq Composite (^IXIC) also shed some early gains but remained up 0.7% in the afternoon session.

Poland’s Prime Minister Mateusz Morawieck has called a security meeting. According to the Associated Press, a top US intelligence agency said Russian missiles entered Poland and killed two people.

The slowdown in stock markets came after Wall Street rallied on renewed signs of optimism that inflation is cooling. The October Producer Price Index (PPI) fell to 8% annually from 8.5% in September after economists polled by Bloomberg had forecast 8.3%.

The annual core PPI also surprised at 6.7% y/y compared to a consensus estimate of 7.2%. The PPI report comes after other key inflation data came in lower-than-expected last Thursday, with consumer prices up 0.4% in October and core prices up 0.3%.

“The core PPI and core PCE deflator follow very similar tracks, although the rise in rents this year has driven an unusually large wedge between them,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a note following the PPI -Publication. “But the pace of rent increases has peaked and our chart suggests that the steep decline we expect in core PPI inflation will pull the core PCE gauge down faster than markets and the Fed.” expect.”

Yields on the benchmark 10-year Treasury note rose to around 3.8% on Tuesday, while the dollar index, which measures the currency against six counterparts including the yen and euro, rose to $107.09.

The early uptrend continued a rally after stocks closed lower on Monday as investors digested fresh comments from Federal Reserve officials on the prospects for interest rate hikes. Fed Vice Chair Lael Brainard said on Monday that she thinks it is “appropriate to move to a slower pace of hikes soon”.

Some strategists argued that Monday’s lows were not due to Brainard’s comment, but rather a signal of what could lie ahead.

“The latest in a mounting wave of evidence that FOMC will move 50 basis points in December, up from 75 basis points since June,” strategists at Bespoke Investments wrote in a note to clients.

Brainard’s comments came after Fed Governor Christopher Waller echoed Fed Chair Jerome Powell’s recent comments that policymakers “have a long way to go” before the central bank halts rate hikes.

“The inflation talk so far is aligning with the soft landing narrative,” Thomas Kennedy, chief investment strategist at JP Morgan Global Wealth Management, told Yahoo Finance Live on Tuesday.

But “inflation is trending lower than expected only sequentially. And the real question will be what level of inflation the Fed is really fighting,” Kennedy added.

Sentiment on equities and global growth among fund managers surveyed by Bank of America remained “uber-bearish” with a macro outlook of “92% forecast ‘stagflation’ in 2023,” strategists led by Michael Hartnett wrote in a note Tuesday.

Also on investors’ plates was US President Joe Biden’s meeting with Chinese President Xi Jinping, the first between the leaders of the world’s two largest economies since Biden took office.

“As leaders of our two nations, I believe we have a shared responsibility to show that China and the United States can manage our differences, prevent competition from becoming anything like a conflict, and find ways to resolve urgent issues.” to work together on global issues that require our mutual cooperation,” Biden said at the opening of the meeting.

U.S. President Joe Biden shakes hands with Chinese President Xi Jinping as they meet on the sidelines of the G20 leaders' summit in Bali, Indonesia November 14, 2022. REUTERS/Kevin Lamarque

U.S. President Joe Biden shakes hands with Chinese President Xi Jinping as they meet on the sidelines of the G20 summit in Bali, Indonesia November 14, 2022. REUTERS/Kevin Lamarque

In company news, Home Depot (HD) kicked off a key earnings week for retailers by reporting a 5.6% sales increase in the third quarter, beating analysts’ expectations as higher prices offset a slowdown in transactions. Walmart (WMT) also beat Wall Street expectations for the quarter and raised its outlook as the retailer “significantly improved” its overstock. The discounter’s inventories rose 13% year over year in the third quarter, compared to 25% in the previous quarter.

With inflation still high, Walmart’s results also showed that those with larger wallets are also coming under pressure.

“We continued to gain grocery market share from households across all income demographics, with nearly three-quarters of the share gain coming from those earning over $100,000 annually,” John David Rainey, Walmart’s executive vice president and chief financial officer, told the results call on Tuesday.

Target (TGT), Lowe’s (LOW) and TJMaxx (TJX) are also set to post earnings on Wednesday.

Elsewhere, cryptocurrency prices stabilized after FTX filed for bankruptcy last week. Bitcoin (BTC) was trading at $16,969.78 as of Tuesday afternoon, while Ethereum (ETH), the second most popular cryptocurrency, was trading at $1,264.22.

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv

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