Dow rises over 100 points as investors wait on inflation update, earnings on horizon

What’s driving markets

Investor sentiment continues to be dominated by expectations of tighter Federal Reserve monetary policy, but if traders were hoping for more clues about what’s next for a key interest rate from Federal Reserve Chair Jerome Powell on Tuesday, they didn’t get it.

Speaking at an international symposium in Sweden, Powell emphasized the importance of central bank independence.

“Restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy,” Powell said in prepared remarks that emphasized the Fed is not “a climate-policy maker.”

However, Powell didn’t broach interest rate policy or the outlook for economy. He was “essentially silent” on the topics in his Tuesday remarks, said Bill Adams, Comerica Bank’s chief economist.

“His choice might reflect this awareness the economy is changing rapidly,” which makes it tough to nail down what’s next for interest rates, said Adams. The economy keeps offering more slowing signs, backed by more data Tuesday, Adams said.

Stocks were trading higher in afternoon trade, coming off the session lows, with communication services stocks leading the S&P index 500 higher. The sector advanced 0.9%, followed by consumer discretionary and health care at 0.8% and 0.6%, respectively.

A day earlier, a 300 point gain for the Dow was wiped out, and then some, after two Fed officials, San Francisco Fed President Mary Daly and Atlanta Fed President Raphael Bostic, said they thought the central bank will need to raise interest rates above 5%.

Andrew Hollenhorst, chief US economist at Citi, said neither of them would be pinned down on whether the pace of interest rates should rise by 25 basis points or 50 basis points at the Fed’s next policy meeting, which concludes February 1. Daly, echoing Powell lately, emphasized that instead what matters should be the “destination,” or the terminal rate, of above 5%.

“However, the reality is that markets will not treat pace and destination as uncorrelated: a slowdown to 25bp in February will serve to increase market perceptions that a pause is imminent, perhaps at a rate below 5%,” wrote Hollenhorst in a Tuesday note.

Federal Reserve Governor Michelle Bowman also said Tuesday she expects more interest rate hikes ahead, and she sees elevated rates holding until there are “compelling signs that inflation has peaked and for more consistent indications that inflation is on a downward path” before easing up on the monetary policy.

Fed officials have pushed back against market expectations that it would start trimming borrowing costs later this year. Hopes for shift in policy were bolstered by a December labor market report last week that showed wage inflation slowing.

Fed funds futures traders now see a 78% likelihood of a 25 basis point hike at its upcoming policy meeting, and a 68% chance of another in March, which would bring the terminal rate to 4.75-5% by mid-year, according to the CME FedWatch tool.

On the economic data front, wholesale inventories numbers on Tuesday showed inventories climbing 1% in November as companies filled inventory ahead of the holidays. Meanwhile, sales fell 0.6%.

A gauge on small business optimism in December also dropped lower than economists expected.

Jamie Dimon, CEO of JPMorgan Chase & Co., on Tuesday walked back his worries of an economic “hurricane,” saying the megabank on Wall Street continues to hire despite layoffs in the sector.

A monthly update of the U.S. consumer-price index report is due Thursday, and Friday brings the start of the fourth quarter company earnings season.

Companies in focus

• Virgin Orbit Holdings shares are down 10.6% after its rocket attempting the first space launch from British soil did not reach orbit. “An anomaly” stood in the way of the final destination, Virgin Orbit said in a tweet.
• Bed Bath & Beyond Inc. third quarter earnings came in below estimates while the decline in same-store sales, a 32% drop, was sharper than the FactSet consensus for a decline of 25.9%. Bed Bath & Beyond shares are up more than 19% on Tuesday.
• Coinbase Global Inc. announced it is cutting 950 jobs in a belt-tightening move to address costs in the roughed up sector of crypto. Trimming personnel will cost the crypto exchange up to $163 million between severance and stock compensation costs, the company said. Coinbase shares rose 7.6%.
• Shares of Oak Street Health, Inc. jumped 28.3% after reports show that CVS was in negotiations to buy the decade-old chain of clinics that service Medicare recipients for more than $10 billion. Shares of CVS Health Corporation were nearly flat.

—Jamie Chisholm contributed to this article.