Market Snapshot: U.S. stocks trade lower after knee-jerk reaction to hot January inflation reading

What’s driving the markets?

Stocks briefly edged into positive territory Thursday, before slipping back into the red late morning, in choppy trade following the release of a key inflation reading.

The year-over-year rate of U.S. inflation climbed again in January to 7.5% and stayed at a 40-year high, suggesting upward pressure on consumer prices is unlikely to relent in the near future. On a monthly basis, the consumer-price index rose 0.6% in January. Economists polled by The Wall Street Journal had forecast a 0.4% gain.

The initial market reaction was understandable after stocks had retraced a large chunk of a January selloff inspired by inflation fears and expectations for a more aggressive Fed, said Art Hogan, chief market strategist at National Securities, in a note.

But that January selloff had come as investors largely “baked in” a Fed interest rate rise in March, he said. While fed-funds futures markets on Thursday moved to more aggressively price in the potential for a half percentage point hike, that was largely playing catch-up to market psychology.

Markets are likely to remain volatile in the run-up to the March rate increase, with an intense focus on any inflation-related data, but are likely to calm once the Fed makes its initial move and provides more detail on its path, Hogan said. Meanwhile, investors are balancing concerns about inflation and the Fed with a better-than-expected earnings reporting season, he said.

“There’s still one CPI and PCE (personal consumer expenditures) report each on the docket before the next [Fed policy] meeting” in March, said Jason Pride, chief investment officer of private wealth at Glenmede.

“All else equal, more fuel to the inflation fire should harden the Fed’s resolve to begin raising interest rates at its next meeting in March and introduce quantitative tightening in the months thereafter,” he said, adding that chances of a half-point hike should be viewed as a possibility, though a quarter-point move remains the base case.

And: High inflation has jacked up the cost of food, gas, cars and rent – and there’s little relief in sight

Treasury yields jumped Thursday, with the 10-year Treasury note TMUBMUSD10Y, 2.038% topping the 2% threshold for the first time since 2019, trading at 2.014% in midday action.

Some analysts see the higher-than-expected inflation number as maintaining pressure on interest-rate sensitive technology stocks, though others contend the hit to growth stocks has largely reflected the expected rise in rates. The Nasdaq Composite suffered its biggest percentage drop in almost two years last month, as well as its worst January in over a decade due to worries over inflation and tighter Federal Reserve monetary policy.

In other data, jobless claims fell 16,000 in latest week to 223,000.

What companies are in focus?

• Disney shares DIS, +3.76% climbed 4.5% after the entertainment giant reported record revenue and a profit of more than $1 billion as it added streaming subscribers than expected over the holidays, theme-park profit surged.
• Shares of Coca-Cola Co. KO, +1.39% were up 1.8% after the beverage giant delivered results that topped expectations and saw sales rise.
• Twitter Inc. TWTR, -0.24% shares rose 0.8% after results largely met expectations and the social media company announced a new $4 billion buyback program.
• Twillio Inc. TWLO, +7.25% shares gained 11% after the cloud communication software group posted a strong outlook and earnings and sales that shot past Wall Street estimates.
• Uber Technologies Inc. UBER stock rose after the ride-share operator reported forecast-beating profit and sales. Shares were halted for pending news in late morning action. At an analyst meeting, Uber said expects to expand its gross bookings by between 22% and 25% a year through 2024, with earnings before interest, taxes, depreciation and amortization, or Ebitda, expected to reach $5 billion in 2024. Shares were down 1.7% after the halt was lifted.

How are other assets trading?

• The ICE U.S. Dollar Index DXY, -0.22%, a measure of the currency against a basket of six major rivals, fell 0.2%.
• West Texas Intermediate crude for March delivery CL.1, +1.71% CLH22, +1.71%  rose 1.8% to $91.24 a barrel. Gold futures for April delivery  GC00, +0.21% GCJ22, +0.21% ticked up 0.2%.
• Bitcoin BTCUSD, +1.82% rebounded from an initial selloff to rise 2.6%.
• The Stoxx 600 Europe  SXXP, -0.21% fell 0.2%, while the FTSE 100  UKX, +0.38%  gained 0.4%.
• The Shanghai Composite  SHCOMP, +0.17%  rose 0.1%, while the Hang Seng Index  HSI, +0.38% gained 0.3% and Japan’s Nikkei 225  NIK, +0.42% rose 0.4%.