Market

Dow Adds Back 400 Points Despite Another Inflation Reading Blowing Past Expectations

Topline

In the run-up to their worst three-day stretch since October, stocks added back to the week’s massive losses Thursday despite the Bureau of Labor Statistics revealing that the nation’s manufacturers paid steeper-than-expected prices last month—a cautionary sign for consumer prices as inflation concerns continue to mount.

Key Facts

The Dow Jones Industrial Average jumped 433 points, or 1.3%, to 34,020 on Thursday, while the S&P 500 and tech-heavy Nasdaq added about 1.2% and 0.7%, respectively, climbing to 4,112 and 13,124 points.

The week’s hardest-hit stocks headed up the market’s partial recovery, with Dow components Home Depot, Travelers and JPMorgan climbing between 2.5% apiece Thursday, while chipmakers Lam Research and Applied Materials lead the Nasdaq, climbing nearly 5% each.

Despite the Thursday gains, the Dow, S&P and Nasdaq are still down 2%, 3% and 4%, respectively, since Friday as investors grappled with the nation’s largest fuel pipeline temporarily shutting down operations—leading to fear-induced gas shortages and price spikes—and the monthly consumer price index’s biggest inflation reading in nearly 13 years.

Released Thursday morning, the Bureau of Labor Statistics’ monthly producer price index, an inflationary measure of the prices producers are paid, came in at 6.2% in April, higher than the 5.8% analysts were expecting and a sharp increase from 4.2% in March.

Boosted by increased food and energy prices, the report should “add to recent inflationary signals,” Morgan Stanley analysts said in a morning note to clients given that the index is often viewed as a forward-looking indicator for consumer prices.

In a potentially promising sign for the U.S. economy, new jobless claims fell to a pandemic low of 473,000 last week (on a seasonally adjusted basis)—coming in better than the 500,000 new claims economists were expecting as businesses continue to reopen and the pace of layoffs slows down.

Crucial Quote 

“The increased demand driving prices higher is not necessarily a bad thing,” Mace McCain, the chief investment officer at $5 billion (in assets) Frost Investment Advisors, said in a note Thursday. “Some inflationary pressures could be good for the market, bringing new capacity on line more quickly and resulting in a more robust rebound. Increasing wages may also result in more productivity as the labor force returns to work.”

Key Background

Markets have been rallying to new highs this year until inflation pressures reached a tipping point this week ahead of the CPI reading. The Dow plunged more than 1,000 points in the first three days of this week, while the tech-heavy Nasdaq plunged nearly 8% below a late-April high. Experts have been warning for months that inflation is now the biggest risk to stocks this year, and due to the historically low prices at the height of pandemic uncertainty last year, it’s unlikely any inflation readings in the months ahead will dip below the Federal Reserve’s long-standing inflation target of 2%. It’s possible another round of larger-than-expected inflation readings will cause the Fed to rethink its accommodative policy of near-zero interest rates and $120 billion in monthly asset buybacks—something that would likely send stocks tumbling anew.

Further Reading

Jobless Claims Hit New Pandemic Low, But 16.9 Million Americans Are Still Receiving Unemployment Benefits (Forbes)

Inflation Spiked 4.2% In April—Hitting 13-Year High As Price Concerns Rock The Market (Forbes)

Dow Falls 300 Points: Stocks Slip A Third Day After ‘Huge’ Inflation Reading (Forbes)

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