Wall Street’s main benchmarks rose Tuesday morning despite another red-hot inflation print as investors weighed news some Russian military units will start returning to their permanent bases after completing drills near the Ukrainian border.
The S&P 500 jumped 1.1%, or 48.56 points, to 4,450.23, while Dow Jones Industrial Average was up 1%, or 389 points to 34,915.25. The Nasdaq Composite advanced 1.63%, or 224.42 points, to 14,009.32 after the escalating threat of a Russian invasion of Ukraine in coming days had weighed on markets as investors already grapple with the prospect of swifter monetary tightening by the Federal Reserve. Meanwhile, oil retreated from its highest price since 2014, falling 3.76% to $91.87 per barrel.
U.S. producer prices recorded another monthly gain in January amid continued supply chain disruptions, serving as yet another indicator of persisting inflationary pressures and reiterating calls on the Fed to raise interest rates.
"Factories are producing more inflation than goods at this point and with supply and labor shortages not going away, inflation is going to stay on the front burner of Federal Reserve officials’ concerns for now," FWDBONDS chief economist Christopher S. Rupkey said in a note. "The Fed is going to start moving up interest rates to curb economic demand, but if inflation keeps going, consumers will stop buying all on their own because they can’t afford it."
On the geopolitical front, fears that the Kremlin will green light a move to force in on Ukraine as soon as this week have created a new headwind for global markets worried the conflict could exacerbate inflation and spur other economic disruptions. TheWall Street Journal reportedon Monday the U.S. was closing its embassy in Kyiv and destroying networking and computer equipment as a Russian military attack becomes increasingly imminent.
“The escalation of Russia and Ukraine tensions come at a time when the stock market is already vulnerable given inflation worries and the potential for Federal Reserve tightening,” Sanders Morris Harris Chairman George Ball said in a note. “If an armed conflict between Russia and Ukraine is somehow avoided, a short-lived relief rally is likely, but there are still too many worries on the horizon for any type of longer lasting upward move higher in stocks.”
The geopolitical tensions add to the uncertainty around central bank policy that has dominated market sentiment in recent months. Last week, the Labor Department reported the Consumer Price Index (CPI) notched a steeper-than-expected 7.5% increase over the year ended January to mark the largest annual jump since 1982.
The surge heightened calls for the Federal Reserve to intervene more aggressively than anticipated to rein in soaring price levels, even raising the possibility of an emergency hike before the bank’s next policy meeting in March.
“You have everything laid out perfectly for the market to go lower,” he said, pointing to higher interest rates, slow earnings, and slow economic growth around the globe. "There's no good reason to see this market go higher.”
Comerica Wealth Management Chief Investment Officer John Lynch pointed out in a note that despite recent volatility in interest rates and equities, areas of the fixed-income markets have exhibited less turbulence. With corporate credit stress limited for investment grade and high-yield bonds, 10-year breakeven inflation expectations remain contained.
“We believe it is important for investors to focus on market signals, rather than headlines, while also respecting traditional patterns for prices, interest rates, and equity valuations,” Lynch said.
Although earnings season is slowly winding down, investors will tune in this week for another docket of corporate results to weigh against monetary and geopolitical conditions.
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