US stock indexes experienced significant gains during the final trading hour on Thursday, fueled by a moderation in wholesale inflation and a rise in weekly jobless claims. These factors indicate that the US economy may be gradually weakening, while the Federal Reserve could be nearing the end of its current tightening cycle.
The S&P 500 advanced 1.4%, potentially achieving its best close since February 7, according to Dow Jones Market Data. Meanwhile, the Dow Jones Industrial Average experienced an increase of almost 400 points, or 1.2%, reaching 34,046. The Nasdaq Composite surged by 2.1%, driven by sizable gains in the communication services and consumer discretionary sectors, which rallied by 2.3% each.
Data released on Thursday revealed that the US Labor Department’s producer price index had risen 0.5% in February, below January’s 1% surge. This figure excludes the volatile components of food, energy, and trade services. Nonetheless, the increase in the overall index was consistent with the expectations of economists surveyed by The Wall Street Journal.
This news comes as a rise in the number of jobless claims indicates that the labor market is experiencing a slowdown. The number of Americans filing applications for unemployment benefits rose by 11,000 in the week ending March 5 to reach a seasonally adjusted total of 227,000, according to the Labor Department. This is the highest level in three months and exceeds the 220,000 claims predicted by economists in a Reuters poll.
Despite the recent surge in jobless claims, the labor market remains robust with unemployment at a 50-year low. However, the increase in claims serves as a reminder of the potential for volatility in the current economic environment.
Additional economic data indicated a moderation in inflation pressures, with the personal consumption expenditures (PCE) price index excluding food and energy prices increasing only 0.1% in February. This figure is lower than the 0.2% increase expected by economists and suggests that inflation remains manageable.
In response to the recent economic data, investors anticipate that the Federal Reserve will continue to adopt a cautious approach to tightening monetary policy. Investors now expect there to be an 89% chance that the US central bank will announce a quarter-point interest rate hike in March, according to the CME FedWatch tool.
Additionally, bond yields have dropped in response to the moderation in inflation and the rise in jobless claims. The yield on the benchmark 10-year US Treasury note decreased by 0.02 percentage points to 2.152% on Thursday, while the yield on the 30-year bond fell by 0.03 percentage points to 2.320%. Lower bond yields can be a positive for equity markets as they reduce the relative attractiveness of fixed income investments compared to equities.
In a further boost to the stock market, oil prices fell on Thursday amid increasing concerns about the impact of rising inflation on global demand. Brent crude lost 0.8% to trade at $110.01 per barrel, while West Texas Intermediate slipped 1.2% to $106.22.
The recent easing of inflationary pressures has helped support the view that the US central bank will adopt a more gradual approach to raising interest rates, which has been a key driver of the stock market’s rapid recovery in recent weeks. Furthermore, expectations of a more gradual tightening cycle have eased concerns about the potential negative impact of higher interest rates on the economic recovery and corporate profits.
In conclusion, a moderation in wholesale inflation and a rise in weekly jobless claims have contributed to significant gains in US stock indexes during the final trading hour on Thursday. These factors suggest that the US economy may be gradually weakening, while the Federal Reserve could be nearing the end of its tightening cycle. Consequently, this could support the continuation of the stock market’s recent strong performance.
However, it is essential for investors to remain vigilant as both the domestic and global economic landscape remains highly uncertain amid the ongoing COVID-19 pandemic, elevated inflation, geopolitical tensions, and a tightening labor market. While the recent gains in the stock market are undoubtedly positive, they should not be taken as an indication that the current challenges facing the global economy have been entirely resolved.