The S&P 500 Index closed nearly flat and the two-year Treasury yield added more than 10 basis points after data showed that inflation remained high. Two Federal Reserve officials then warned that the remedy might require higher interest rates for a long period of time, though one policymaker suggested that the end might be near. 

Swaps contracts showed traders gave near-even odds for a quarter-point rate increase by the Fed in June, following similar hikes in March and May. The rate-sensitive two-year Treasury yield rose past 4.6 per cent.

Equity indexes fell in the morning as Federal Reserve Bank of Richmond President Thomas Barkin told Bloomberg TV that the central bank might “have to do more”to fight inflation and Dallas Fed President Lorie Logan said rate increases could last “for a longer period than previously anticipated.” 

But stocks pared losses after Federal Reserve Bank of Philadelphia President Patrick Harker said that policymakers were nearing the point where rates were restrictive enough: “In my view, we are not done yet … but we are likely close.”

“Stocks are probably rising due to Harker,” said Steve Sosnick, chief strategist at Interactive Brokers. “Close to done on tightening is vague, but certainly not a hawkish tone.” 

Equity bulls clung to one CPI component that Federal Reserve Chair Jerome Powell has singled out as a must-watch: The so-called super-core figure, or core services minus housing, came in at a slower 0.3 per cent pace in the month. 

But Win Thin, currency strategist at Brown Brothers Harriman, wasn’t buying this super-core argument. 

“If the market and the Fed have to get THIS granular to somehow weave an inflation argument, then they’ve lost the argument,” he wrote in a text. “Core core core core inflation? C’mon man!”

Here is what other Wall Street analysts were saying about CPI and the Fed:

Mike Bailey, director of research at FBB Capital Partners:

“We’ve seen lots of Fedspeak in both directions, so this is just one more data point. However, investors are really puzzled with today’s CPI print and perhaps the Harker comments help cement a bullish theme of Fed easing later this year.”

Michael Contopoulos, head of fixed income at Richard Bernstein Advisors:  

“If you think inflation is going to stick around for a while, as we do, then it also means the Fed needs to continue to hike until they really destroy demand. This means they need to crack labor. If you crack labor, long term growth and inflation expectations need to fall as a ‘hard landing’ scenario becomes more likely.”

Brian Nick, chief investment strategist at Nuveen:

“The Fed has won every single one of these battles over the last 18 months — every time the markets have tried to price out or discount the Fed’s rhetoric or their forecasts, the markets have basically lost that fight, they’ve lost that game of chicken.”

Jay Hatfield, CEO and CIO of Infrastructure Capital Advisors:

“We continue to forecast inflation will rapidly decline as the BLS slowly reflects the reality of housing deflation in their estimate of shelter inflation. This lag is approximately 12 months, so second half inflation numbers should come down rapidly.”

John Plassard, investment specialist at Mirabaud:

“It’s the seventh month in a row of inflation going lower, the disinflation narrative is not threatened — on the contrary. It must be said there were some worries around a bad surprise so this is reassuring before the next meeting of the Fed.”

Mark Dowding, chief investment officer at BlueBay Asset Management:

“Our own view is that yields are more likely to head higher as we think the Fed remain hawkish for the time being. This poses a headwind for equities.”

Oil fell for a second day after the announcement that the U.S. was selling more crude from its strategic reserves. 

The yen rose following the formal nomination of Kazuo Ueda as the next Bank of Japan governor. Argentina’s annual inflation rate hit 99 per cent. And Turkey prepared to channel billions of liras into its stock market, which will reopen Wednesday after the devastating earthquakes Feb. 6. 

Key events:

• U.S. retail sales, UK CPI Wednesday
• U.S. jobless claims, Australia unemployment, Cleveland Fed President Loretta Mester speaks at Global Interdependence Center event Thursday
• France CPI, Russia GDP Friday

Some of the main moves in markets:

• Stocks
• The S&P 500 was little changed as of 4:05 p.m. New York time
• The Nasdaq 100 rose 0.7 per cent to the highest since Feb. 7
• The Dow Jones Industrial Average fell 0.5 per cent
• The MSCI World index rose 0.8 per cent, more than any closing gain since Feb. 7

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro rose 0.1 per cent to US$1.0738
• The British pound rose 0.3 per cent to US$1.2175
• The Japanese yen fell 0.5 per cent to 133.04 per dollar

Cryptocurrencies

• Bitcoin surged 2.5 per cent, more than any closing gain since Feb. 1
• Ether surged 4.4 per cent, more than any closing gain since Jan. 29

Bonds

• The yield on 10-year Treasuries advanced five basis points to 3.75 per cent
• Germany’s 10-year yield advanced seven basis points to 2.44 per cent
• Britain’s 10-year yield advanced 12 basis points, more than any closing advance since Feb. 6

Commodities

• West Texas Intermediate crude fell 1.3 per cent to US$79.13 a barrel
• Gold futures rose 0.2 per cent to US$1,866.30 an ounce