U.S. stocks moved higher Tuesday, while the dollar eased from a two-year high against its global peers and Treasury bond yields pared their recent surge, as investors reacted to a market-shaking reading of inflation in the world's biggest economy.
Headline inflation surged to the fastest pace since December of 1981 last month, the Bureau of Labor Statistics said, speeding to a faster-than-expected reading of 8.5%. Core inflation, however, came in at 0.3%, a softer-than-expected reading that stoked bets on peaking consumer prices.
The U.S. dollar index, which tracks the greenback against a basket of six global currencies, was marked 0.005% higher on the session at 99.976, after hitting a two-year high of 100.21 overnight, as traders re-set currency levels ahead of the Federal Reserve's signaling on higher interest rates.
Benchmark 10-year notes, which hit 2.817% in European dealing, the highest since 2018, retreated to 2.702% following the CPI data release.
Inflation is lasting much longer than expected amid supply chain issues, rising energy prices and increased consumer demand as the economy continues to reopen," said Nancy Davis, founder of Quadratic Capital Management and portfolio manager of the Quadratic Interest Rate Volatility and Inflation Hedge Exchange-Traded Fund (IVOL).
"Given the risk of high inflation and with a hawkish Fed, the probability of stagflation is increasing, which is an environment that generally bodes poorly for both stocks and bonds," she added.
The White House, had cautioned late Monday that Americans should be ready for an "extraordinarily elevated" level of inflation from last month's reading, which is due today at 8:30 am Eastern time, thanks in part to the impact on food and energy prices from Russia's war on Ukraine.
U.S. crude futures hit a ten-year high of $123.70 per barrel last month in the immediate wake of Moscow's invasion and the threat of sanctions on energy exports, while wheat and other food prices leaped on reports of damaged crops and grain embargoes linked to the conflict.
“We expect a large difference between core and headline inflation ... reflecting the global disruptions in energy and food markets,” White House Press Secretary Jen Psaki said Monday. “
Inflation pressures, which are likely to have surged to the highest levels since 1981 last month, have dictated trading on Wall Street for much of the past week, hammering tech and growth stocks and pulling the broadest measure of global stocks, the MSCI World Index, to the lowest level in a month.
Little relief appears in sight: the CME Group's FedWatch tool pegs an 87.7% chance of a 50 basis point rate hike from the Fed in May, followed by a 58.6% chance of a follow-on move in May and 46% chance of a third 50 basis point hike in July.
On Wall Street, the Dow Jones Industrial Average was marked 240 points higher in late morning trading while the S&P 500, which is down 7.4% for the year, booked a 42 point advance. The tech-focused Nasdaq gained 185 points.
In terms of individual stocks, Veru (VERU) shares soared higher pre-market trading, potentially adding $200 million to the value of the Miami-based biotech, following the drugmaker's plans to seek Emergency Use Authorization from the U.S. Food & Drug Administration for its newly-developed Covid treatment.
CarMax (KMX) fell 4.75% after it posted weaker-than-expected fourth quarter earnings Tuesday as retail used car sales declined amid surging prices, waning consumer confidence and the expirations of Covid benefits from the federal government.
Cisco Systems (CSCO) shares moved 0.3% lower after analysts at Citigroup cut their rating on the network equipment maker to 'sell' while slashing their price target by more than 30%.
Citi analyst Jim Suva loped $20 from his Cisco price target, which now sits at $45 per share, while Morgan Stanley cut their price target on the group to $59 per share in a pair of analysts notes published early Tuesday.
Starbucks (SBUX) shares were little-changed following a downgrade to 'neutral' from Citigroup analyst Wendy Nicholson, who also slashed her price target by $29 to $91 per share.
Starbucks shares have fallen more than 11% since interim CEO Howard Schultz moved to suspend share buybacks at the world's biggest coffee chain, a decision several analysts have said could investment and capital allocation changes that could trim near-term earnings growth.
