Earlier in the day, shares were sluggish as financial institutions released their earnings reports; however, the mood changed as investors seemed to accept that some of the less-than-ideal data were expected by many.
Despite rising interest rates and inflation set by the Federal Reserve, US consumers had managed to hold their own, as revealed on Friday when Bank of America and JP Morgan reported their fourth-quarter results. However, both banks have warned of a possible economic downturn.
Investors expect the Federal Reserve to raise the interest rate by a quarter point when they meet on February 1. This is a more minor increase than the previous two meetings, which saw 50 and 75 basis points adjustments. Additionally, the market expects the range to widen to 4.75-5% when the Fed reconvenes in March, which is thought to be the final hike.
Analysts have indicated that Federal Reserve members hint at a slower pace of tightening in the foreseeable future. The probability of a quarter-point increase at the February 1 FOMC meeting is currently 93.2%, a notable increase from the 76.7% recorded the day before and 35.1% a month ago.
The Dow ended the day higher, mainly due to figures indicating that deflation has set in December. This led to speculation that the Federal Reserve will implement smaller hikes when they meet next month. The data revealed that consumer prices fell by 0.1%, more than economists expected. This was the first decline since May 2020, taking the YoY CPI in December to 6.5% from 7.1% in November.
Core inflation, which excludes food and energy costs, rose 0.3%, as expected. Essential services excluding housing, a vital metric of inflation tracked by Jerome Powell, was 0.26%, which is “substantially lower than the normal rate of 0.5%,” according to Morgan Stanley.
