U.S. Stocks Slip as Signs of Inflation Temper Optimism on Growth

  • Fed's preferred inflation gauge rises by most since 2014
  • S&P 500 posts second week of gains, hit 7-week high Thursday

Global Stocks Break Away From Shanghai Influence

U.S. stocks slipped, while still posting a second-straight weekly gain, with optimism on the economy tempered after signs of firming inflation fueled speculation interest rates may rise sooner than previously expected.

Equities struggled to add to gains Friday after a nearly 7 percent run-up in the two weeks since the Standard & Poor’s 500 Index reached a 22-month low. Higher growth and inflation readings helped spur a stronger dollar, sending some companies with significant overseas business lower. Consumer staples fell, with Coca-Cola Co. losing 2.3 percent. Raw-materials producers rallied on easing growth concerns, with Freeport-McMoRan Inc. rising 4.4 percent as copper surged.

The S&P 500 fell 0.2 percent to 1,948.05 at 4 p.m. in New York, after rising as much as 0.6 percent. The gauge held above its average price during the past 50 days after climbing through that level yesterday for the first time this year. The Dow Jones Industrial Average lost 57.32 points, or 0.3 percent, to 16,639.97, and the Nasdaq Composite Index increased 0.2 percent.

“There hasn’t been a lot of conviction,” said Michael Block, chief equity strategist at Rhino Trading Partners LLC in New York. “It tells me we’re going to be stuck in a range here. We’re up on oil stability, China talk from the PBOC and GDP wasn’t a complete disaster with PCE a little better,” he said referring to the personal consumption expenditures gauge.

A report today showed the Federal Reserve’s preferred measure of inflation rose by the most since October 2014, illustrating the challenge for U.S. central bankers as they consider tighter monetary policy amid feeble global markets. Also, consumer purchases climbed in January by the most in eight months, while a separate report showed the U.S. economy unexpectedly expanded at a faster pace in the fourth quarter than initially estimated.

Following the data, traders raised their bets for further Fed rate increases this year. The probability of a June boost rose to 35 percent from less than 24 percent yesterday, while odds of a December move reached 52 percent from 36 percent. Chances for a December hike had slipped to 11 percent at the height of this month’s stock selloff on Feb. 11.

“Inflation is definitely something that the Fed is looking at and it looks like it is ticking up,” said Thomas Garcia, head of equity trading at Santa Fe, New Mexico-based Thornburg Investment Management Inc. “The problem is that we have economies that are not doing so hot. What you don’t want is inflation with an economy that is slowing down.”

Stocks in Asia and Europe rose after China’s central bank said it sees room for monetary easing, and Group of 20 finance chiefs discussed stimulus efforts. Concern about the impact of China’s slowdown on global growth and a related rout in commodity prices have helped push the S&P 500 down as much as 11 percent this year on a closing basis to its lowest level since 2014.

G-20 Gathers

The global market turmoil that began the year is heavy on investors’ minds as the G-20 meets. A lack of agreement this weekend on fiscal or monetary initiatives from the group risks disappointing investors who have urged some coordinated action to address stock declines and weak prospects for growth.

The S&P 500 rose 1.6 percent this week, extending a rebound from its the lowest level since April 2014, as banks and technology shares paced gains and oil showed signs of stabilizing. The gauge has erased a monthly loss of as much as 5.7 percent and cut its 2016 slide by more than half. It rose to a seven-week high yesterday.

Even as stocks rebounded in the past two weeks, participation has slackened. Daily volume on U.S. exchanges since Feb. 11 was 8.1 billion shares, 13 percent lower than the average volume of 9.3 billion for the year up until then. An average 7.6 billion shares a day changed hands this week. About 7.9 billion shares traded today, 4 percent below the three-month average.

The Chicago Board Options Exchange Volatility Index rose 3.7 percent to 19.81 Friday. The measure of market turbulence known as the VIX is down about 2 percent this month after erasing a climb of more than 39 percent.

Raw-Materials Rally

Six of the S&P 500’s 10 main groups declined, with utilities tumbling 2.7 percent, the biggest drop in three months as rising bond yields made the group’s dividend payout look less attractive. Consumer staples had the steepest slide in five weeks amid speculation their profits could be hurt by a stronger dollar. Raw-material, financial and energy companies rose the most.

While higher bond yields weighed on utilities, they were a boon for banks as investors bet rising rates would help profits. Lenders in the benchmark rose for a second day, with Bank of America Corp. up 3.1 percent to a three-week high. Citigroup Inc. added 2.3 percent.

Alcoholic beverage maker Brown-Forman Corp., which generated more than half its sales last year outside the U.S., fell 3.2 percent. PepsiCo. Inc. and Wal-Mart Stores Inc. lost at least 2.2 percent, with Pepsi capping its worst drop this year.

Within raw-materials, Freeport-McMoRan rose for the first time in four days, and is headed toward its best monthly gain ever, up more nearly 62 percent. Fertilizer makers Mosaic Co. and CF Industries Holdings Inc. increased more than 5.4 percent.

Kraft, Penney

Among shares moving on corporate news, Kraft Heinz Co. rose 3.8 percent after its quarterly earnings topped estimates, helped by growth of condiment sales. J.C. Penney Co. rallied 15 percent, the biggest increase in more than a year, after its profit also exceeded estimates and the retailer forecast an even rosier 2016.

Weight Watchers International Inc. tumbled 29 percent, the most in a year. A high-profile partnership with Oprah Winfrey failed to reverse the company’s financial decline as it posted a surprise fourth-quarter loss.

With the earnings season drawing to a close, analysts’ predictions for fourth-quarter profits have improved. They estimate a 3.7 percent drop at S&P 500 companies, from Jan. 15 calls for a 7 percent slump. About three-quarters of firms in the benchmark have beat profit projections, while less than half topped sales forecasts.

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