Dow Jones records third highest close in history after inflation report, with eyes on Fed decision

By Frances Yue and Andrew Keshner

U.S. stocks closed at fresh 2023 highs on Tuesday, as investors wait for the Federal Reserve's interest rate announcement Wednesday and hope the latest inflation data doesn't crimp optimism around rate cuts.

How stocks traded

The Dow Jones Industrial Average DJIA rose 173.01 points or 0.5% to close at 36,577.94, its third highest close in history and just 0.6% below its record close of 36,799.65 hit on Jan. 4, 2022. The S&P 500 SPX went up 21.26 points, or 0.5% to finish at 4,643.70, its highest close since Jan. 14, 2022.The Nasdaq Composite COMP rose 100.91 points or 0.7% to 14,533.40, its highest finish since March 29, 2022.

On Monday, the Dow Jones Industrial Average gained 0.4% Monday, the S&P 500 climbed 0.4% and the Nasdaq Composite advanced 0.2%.

What drove markets

Stocks reached fresh highs for the year following an inflation report mostly in line with Wall Street expectations, though slightly warmer than hoped.

But for traders, it's essentially back to a holding pattern ahead of Wednesday afternoon's Fed announcement, said Quincy Krosby, chief global strategist for LPL Financial. "The most important thing for the market now is to gain clarity on the Fed's thinking about the rate cuts," she told MarketWatch.

Month over month, the U.S. cost of living increased 0.1%, coming in slightly higher than expectations for no monthly increase.

Year over year, inflation eased to 3.1% from 3.2%, in line with estimates. Core inflation after stripping away food and energy prices increased to 0.3% month over month and stayed unchanged year over year, also in line with expectations.

The print was "somewhere between bad and good," according to Ali Jaffery, economist at CIBC Capital Markets.

As Tuesday's trading session continued, investors were increasingly focused on the sunny side. "Looking under the hood, it is actually pretty positive," said Sonu Varghese, global macro strategist at Carson Group.

The core inflation numbers were bolstered by bumps for used car and shelter prices, but those price increases will ease in time, Varghese said. "Inflation is going down, but it's not going down in a straight line."

Still, the inflation trend "remains above the Fed's 2% target, with the last mile the hardest part of the journey," said Josh Jamner, investment strategy analyst at ClearBridge Investments.

The central bank is widely expected to leave borrowing costs unchanged at a range of 5.25% to 5.50% at the conclusion of its two-day meeting on Wednesday.

But there still is Fed Chairman Jerome Powell's press conference and the latest release on the "dot plot" to watch, Krosby said. "What the market wants to hear from the Fed is more confirmation that a rate cut is conceivable in 2024."

Fed-funds futures are now eyeing a rate cut in May, instead of March. The chance of a quarter point cut in May climbed to 50%, up from 40% a week ago, according to the CME FedWatch tool.

Markets are on a six-week winning streak. The S&P 500 index sits at its best level since January 2022, having rallied 21% so far this year, partly on hopes slowing inflation will allow the Federal Reserve to start cutting interest rates in coming months.

While this year's rally has been mostly driven by a few mega-cap tech companies, the rest of the stocks have recently started to catch up, with inflation moderating and the Fed expected to be on the sidelines, according to Todd Walsh, chief executive and chief technical analyst at Alpha Cubed Investments.

He expects the S&P 500 to rise above 4,800 in the first quarter of 2024, despite volatility along the way, Walsh said in a call.

Treasury yields edged lower on the heels of the latest CPI numbers.

Companies in focus

Oracle Corp. ORCL shares are more than 12.4% lower Tuesday after earnings results Monday afternoon missed revenue expectations. Revenue in the fiscal second quarter was $12.94 billion while FactSet consensus was for $13.05 billion.Ford Motor Co. F shares were 0.8% higher, after reports the company is sharply cutting back on electric F-150 Lightning pickup truck production. Choice Hotels International Inc. CHH shares ended 1.9% lower after the budget hotel chain's hostile bid for Wydham Hotels & Resorts in a long-running effort at a tie-up. Shares of Macy's M closed 8.3% lower as Wall Street reacted to a buyout offer for the retailer.

- Jamie Chisholm contributed.

-Frances Yue -Andrew Keshner

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

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12-12-23 1632ET

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