Market Snapshot: Dow ends 100 points higher, stocks book back-to-back gains as Wall Street gauges cooler inflation report, awaits Fed rate decision

What drove markets

U.S. stocks rallied on Tuesday with the Dow Jones Industrial Average initially jumping over 700 points in early activity, after the November consumer-price index showed inflation cooled considerably to its lowest level in nearly a year. However, the three major indexes came off their best levels in afternoon trade.

The year-over-year CPI for November was 7.1%. That’s less than the forecast by economists expecting to see a decline to 7.3%. The 7.1% print is down from 7.7% last month. The closely watched “core” CPI, which strips out food and energy costs, came in at 6% year over year, lower than expectations and lower than October’s 6.3% annualized increase.

The data came a day before the Fed is expected to deliver another interest rate increase. The central bank is widely expected to raise rates by 50 basis points to a range of 4.25% to 4.50%. That would follow four jumbo-sized 75 basis point hikes beginning in June.

Adam Turnquist, chief technical strategist at LPL Financial, said the data takes “any type of major hawkish surprise” off the table, and it gives credibility to the Fed’s fight against inflation.

“It’s not necessarily saying that the Fed is going to come out tomorrow and be incrementally more dovish, or talk about cutting rates next year,” Turnquist told MarketWatch. “It’s just really the removal of that hawkish uncertainty that we’re seeing today.”

See: Why November U.S. CPI data is seen as a ‘game-changer’ for financial markets

Economists at Citi think the report casts a dovish shadow on tomorrow’s FOMC meeting and will help narrate the slowdown to a 50bp hike. However, they warned the risk remains that Chairman Jerome Powell doesn’t endorse the market’s more dovish views of the Fed’s likely policy stance.

“Chair Powell has a somewhat binary choice to make — any comments that can be construed as dovish will stoke the rally in equity markets and lead to a further easing of financial conditions,” wrote Andrew Hollenhorst, chief US economist at Citi.

“To avoid this, Powell would have to both downplay the importance of this morning’s inflation report (e.g. emphasize that there is not yet ‘compelling evidence’ of a slowdown) and probably explicitly push against the market pricing of a sub-5% terminal policy rates followed by imminent cuts,” he added.

See: End of 40-year era of falling interest rates is crucial ‘sea change’ for investors: Howard Marks

As of Tuesday afternoon, there was more than a 50-50 chance of a 25 basis point increase to the fed-funds rate in February, in the eyes of fed funds futures traders.

But a rate increase in February of only a quarter basis point is “wishful thinking,” according to Robert Pavlik, senior portfolio manager at Dakota Wealth Management. He expects 50 basis-point increases on Wednesday, followed by another in February, and then a chance of a smaller 25 basis points hike at the Fed’s March meeting.

“The data [CPI data] was good, but not good enough to inspire the Fed to back off.…I think anybody banking on 25 [basis points] in February is seeing something that is not there.”

Pavlik said Tuesday’s intraday retreat in stocks reflected “a little bit of rationality returning to the market” after stocks soared at the opening bell.

Intraday market moves are common on CPI days. Throughout the year, trading on days of consumer-price index data has been volatile.

“We don’t get many days as important as the next two, and the U.S. CPI today and the FOMC [Fed] tomorrow are likely to be the difference between a big Santa Claus rally and a visit from Scrooge ahead of Christmas,” said Jim Reid, strategist at Deutsche Bank, in a note ahead of the November CPI release.

“Bear in mind the S&P 500’s best and worst day of the year so far have both come on a CPI day, and it was only last month that the downside surprise triggered a seismic market reaction, leading to the biggest one-day gain for the S&P 500 (+5.54%) since April 2020, and the largest daily decline in the 2-year Treasury yield (-24.7bps) since 2008,” Reid added.

See: Inflation retreat puts key bond ETFs on pace for best day in a week

Treasury yields fell after the CPI report, with the 10-year Treasury yield TMUBMUSD10Y, 3.507% dropping 11 basis points to 3.501%. The greenback fell with the key U.S. dollar index DXY, -1.06% slumping to six-month low. The ICE U.S. Dollar Index, a measure of the currency against a basket of six major rivals, down 1.1% at 104.02.

The Federal Reserve announces its rate hike decision Wednesday at 2 p.m. Eastern, followed by Powell’s news conference at 2:30 p.m. The European Central Bank and the Bank of England will announce their rate decisions on Thursday.

Companies in focus

• Merck & Co. Inc.  MRK, +1.78% and Moderna Inc. MRNA, +19.63% said Tuesday that their experimental mRNA-based cancer vaccine reduced the risk of recurrence or death when used with Merck’s Keytruda in patients with late-stage melanoma. Moderna shares finished nearly 20% higher, while Merck shares rose 1.8%.
• Eli Lilly & Co.  LLY, -2.34% released its 2023 guidance on Tuesday, highlighting potential launches on treatments including one for obesity. The pharmaceutical company is forecasting earnings per share (EPS) to range next year from $7.65 to $7.85, with a revenue ranged from $30.3 billion to $30.8 billion, the company said. FactSet consensus called for an EPS of $9.16 and revenue of $30.2 billion. Shares were down 2.3% in trading Tuesday.
• Shares of Tesla Inc. TSLA, -4.09%  extended declines, down 4.1% on Tuesday. The electric vehicle maker was reported last week to suspend Model Y assembly at its Shanghai plant in late December. The company is on pace to close with a market cap less than $500 billion for the first time in over two years, according to Dow Jones Market Data.
• Shares of Oracle Corporation ORCL, -0.89% shed 0.8% after the software developer Monday posted better-than-expected financial results for its latest quarter. The company reported fiscal second-quarter net income of $1.74 billion, or 63 cents a share, on revenue of $12.28 billion, up from $10.36 billion a year ago.
• United Airlines Holdings UAL, -6.94% shares ended nearly 7% lower after the carrier placed an order for 100 of Boeing’s top-of-the-line 787 Dreamliners, with options to purchase 100 more. Wall Street analysts said it is a “significant win” for Boeing. Boeing Company‘s BA, +0.46% shares gained 0.5%.

— Jamie Chisholm contributed to this article.