U.S. stocks shrugged off a weak open to finish strong on Tuesday, as markets extended their recovery from the worst selloff in years. However, a high-profile inflation report Wednesday morning could spark another mass exodus from the market should consumer prices pick up faster than expected.
Wall Street on Tuesday extended its recovery to three days, with all major indexes recording gains. The large-cap S&P 500 Index rose 0.3% by the close to finish at 2,662.94. Nine of 11 S&P 500 sectors contributed to the gains, with consumer stocks and financials leading the rally.
The Dow Jones Industrial Average added 39.18 points, or 0.2%, to finish at 24,640.45. The technology-focused Nasdaq Composite Index rose 0.3% to 7,013.51.
Wall Street’s major indexes have now recovered more than 3% since Thursday’s low. The Dow and S&P 500 have nearly erased their year-to-date losses, while the Nasdaq has gained 1.6%.
The CBOE VIX Volatility Index dipped 2.7% to close at 24.93, on a scale of 1-100 where 20 represents the historic mean. The investor fear index is down for three straight sessions after recording its most dramatic rally in years.
Wednesday’s report on U.S. consumer inflation will be closely watched by investors looking to price in future interest rate hikes. The January consumer price index (CPI) is forecast to weaken to 1.9% annually, down from 2.1% and slightly below the Federal Reserve’s 2% target. Core inflation, which strips away volatile goods such as food and energy, is expected to come in at 1.7% year-over-year.
It was inflation data that triggered the recent slide in U.S. stocks after the Labor Department reported a 2.9% uptick in average hourly wages. The growth was the largest in over eight years and sent a strong signal that inflationary pressures are building.
It is conventional wisdom for Wall Street that a sustained rise in inflation equals higher interest rates. As it now stands, the Federal Reserve has a more than three-in-four chance of raising rates next month, according to the CME Group’s FedWatch Tool.
The March Federal Open Market Committee (FOMC) will be the first one chaired by Jerome Powell, who replaced Janet Yellen earlier this month. On Powell’s first day on the job, the S&P 500 Index collapsed 4.1%, the steepest fall since 2011.
One factor to watch for in the future is fluctuating oil prices. Although fuel is omitted from the “core” inflation reading, it could still impact investor sentiment. Crude oil is coming off its biggest single-week drop in three years on a resurgence in U.S. shale.
Analysts also say that methodological changes could impact the size of price acceleration in January.
The official CPI data will be unleashed on the market at 8:30 a.m. ET, and will be accompanied by a separate report on retail sales. Both reports will be used by investors to evaluate the health of the U.S. economy.
Featured image courtesy of Shutterstock.