U.S. stocks higher in cautious trading ahead of inflation report, bank earnings

What’s driving markets

Inflation, along with its impact on bond markets and the Federal Reserve’s monetary-policy trajectory, is the primary focus for markets this week as investors remain on hold ahead of Thursday’s December consumer price index and high-profile corporate earnings reports on Friday, when some of the big banks will kick off the fourth-quarter 2023 earnings season.

“The market is hopeful for continued progress on disinflation, but those are the optimists and that’s the soft-landing story,” said Nanette Abuhoff Jacobson, a Boston-based global investment strategist for Hartford Funds, which managed $123.2 billion in assets as of September.

The market’s shaky beginning to the new year, with all three major stock indexes either down or unchanged since Jan. 2, “is reflecting concern that inflation won’t deliver to market expectations, which is for the Fed to cut five or six times this year,” she said via phone. “We would get five or six cuts if it looked like recession fears were reigniting, and so this idea that the Fed is going to deliver these five or six cuts in a perfectly benign environment is optimistic.”

The S&P 500 is just shy of its record closing high of 4796.56 reached a little over two years ago, after rallying strongly in the last few months on hopes that easing inflation will allow the central bank to lower interest rates sooner and faster than the markets previously anticipated.

The yield on the 10-year Treasury
BX:TMUBMUSD10Y,
the benchmark for borrowing costs, has fallen from 5% in October to 4.02% on Wednesday.

For the market’s bullish narrative to keep playing out, inflation must continue to fall back toward the Fed’s 2% target, placing great emphasis on December’s CPI figures, which will be published at 8:30 a.m. Eastern time on Thursday.

See: These traders bet on surprise blip higher in key December inflation reading

Economists expect annual headline CPI inflation to inch up to 3.2% last month from 3.1% in November. The core reading, which strips out more volatile items like food and energy, is expected to fall to 3.8% year-over-year from 4% previously.

Adam Phillips, the California-based director of portfolio strategy at EP Wealth Advisors, said the CPI report may give investors enough confidence that the disinflation is likely to continue, even if the price levels are “still a very long way from anything that is considered healthy.”

However, the economy has certain factors that are beyond the Fed’s control, such as the volatility in supply chains, growing geopolitical risks, and a potential resurgence in inflation, Phillips told MarketWatch via phone on Wednesday.

In U.S. economic data, wholesale inventories declined 0.2% in November, according to the Commerce Department. New York Fed President John Williams will speak in White Plains, N.Y., at 3:15 p.m. Eastern time.

Companies in focus

• Shares of Boeing Co. 
  BA,
  +1.32%
  edged up 1.8% on Wednesday. Chief executive David Calhoun told employees on Tuesday that the jet maker needed to acknowledge its mistakes after a panel blew off a 737 Max 9 jet flown by Alaska Airlines days earlier, and to approach the matter with “complete transparency.”

• Crypto-related stocks slipped after Securities and Exchange Commission Chair Gary Gensler denied that the agency had approved spot bitcoin ETFs. Shares of Coinbase Global Inc.
  COIN,
  -0.07%
  fell 0.8%, and MicroStrategy Inc.
  MSTR,
  +0.64%
  was off 1%. Prices of bitcoin
  BTCUSD,
  +1.53%
  dropped below $44,500 before rebounding on Wednesday.

• Shares of Intuitive Surgical Inc.
  ISRG,
  +8.69%
   rallied 6.6% and was on pace for its fourth day of gains in the past five sessions. The maker of robotic surgical equipment said it expects fourth-quarter sales that were above Wall Street’s expectations, helped by a recovery in China.

Jamie Chisholm contributed.