NEW YORK (AP) — Stocks on Wall Street are ticking higher Thursday following the latest sign that inflation continues to cool.
The S&P 500 was 0.3% higher in early trading after a report showed inflation at the wholesale level slowed last month by more than expected. The Dow Jones Industrial Average was up 5 points, or less than 0.1%, at 33,52, as of 9:45 a.m. Eastern time, while the Nasdaq composite was 0.8% higher.
Thursday’s report showed that prices paid by producers last month were 2.7% higher than a year earlier, the lowest inflation level for them in more than two years. The hope on Wall Street is that easier inflation on the wholesale level will not only support profits for companies but also flow through to cooler inflation for consumers. A day earlier, a separate report said inflation for consumers slowed to 5%.
High inflation and how high the Federal Reserve will hike interest rates to tame it have been at the center of Wall Street’s struggles for more than a year. The Fed has hiked rates at such a ferocious pace over the last year that it’s already slowed parts of the economy and caused strains to appear in the banking system.
A separate report Thursday said slightly more workers applied for unemployment benefits last week than expected, though the job market has remained remarkably resilient. That plus the inflation data pushed traders to shade some bets toward the Fed holding rates steady in May, though the majority still call for another hike of a quarter percentage point.
The Fed has hiked rates at every one of its meetings since early last year, often by double or triple the usual amount. High rates can smother inflation but only by slowing the entire economy, raising the risk of a recession and hurting prices for investments.
High interest rates and still-high inflation are eating away at corporate profits, and the biggest U.S. companies are starting to tell investors how much they earned during the first three months of the year. Expectations are low, with forecasts calling for the sharpest drop in earnings since the pandemic was pummeling the economy in 2020.
Delta Air Lines was down 1% after flipping between gains and losses at the open of trading. It reported weaker results for the latest quarter than expected, but it also said customers still want to fly despite all the economy’s challenges. It predicted a bigger-than-expected profit for the second quarter.
Investors are likely to focus more on such forecasts than on the backwards-looking results of the last three months. Even though forecasts for 2023 earnings have come down a bit, “2023 consensus still looks optimistic if we are headed to a recession,” equity strategist Savita Subramanian wrote in a BofA Global Research report.
The bond market has shown much more worry about a possible recession than the stock market, with traders betting heavily on the Fed having to cut interest rates later this year in order to prop up the economy.
Treasury yields fell further following Thursday’s weaker-than-expected reports. The yield on the 10-year Treasury fell to 3.37% from 3.40% late Wednesday. It helps set rates for mortgages and other important loans.
The two-year yield, which moves more on expectations for the Fed, fell to 3.90% from 3.97%.
Strategists at Goldman Sachs are more optimistic about the economy’s prospects than many, forecasting only a 35% probability of a recession. But they also say prices in markets available now may mean not much upside is left.
The bond market may be looking for rate cuts, but the Fed may have less room to lower them given how strong the job market is. Profit margins may also have little room to rise further, which would hamper stocks.
That leaves the possibility for further returns from stocks and bonds “not as stellar as one might expect,” Jan Hatzius, Goldman Sachs’ chief economist and head of global investment research, said in a report.
AP Business Writers Joe McDonald and Matt Ott contributed.