Stocks rose on bets the upcoming consumer price index will show further softening, which could help build the case for the Federal Reserve to slow its pace of rate hikes — even as some officials say it’s too early to declare victory over inflation.

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With Jerome Powell’s silence on the outlook for monetary policy at an event earlier Tuesday, the equity market struggled to find direction. The choppiness gave way to a rebound in afternoon New York trading, with the S&P 500 coming back above its key 3,900 mark. Treasury two-year US yields pared their advance while the dollar was little changed.

Thursday’s inflation figures are likely to come in cooler than expected, helping stocks extend a bear-market rally, according to JPMorgan Chase & Co.’s sales and trading desk. While consensus expects December’s CPI to slide to a 6.5 per cent annualized pace, the bank’s team including Andrew Tyler sees an almost two-in-three chance for the data to arrive within 10 basis points of the estimate, with a bias to the soft side. 

While Powell didn’t directly comment on the Fed’s next steps at a forum in Stockholm, he did say that “restoring price stability when inflation is high can require measures that are not popular in the short term as we raise rates to slow the economy.” Fed Governor Michelle Bowman said the central bank has more work to do to curb inflation, noting that further tightening is needed.

“You’ve got the Fed that’s continuing to try to rain on everybody’s parade, talking about how interest rates need to go higher,” said Brian Nick, chief investment strategist at Nuveen. “So that’s the one fly in the ointment — the Fed is still out there trying to slow things down, and the markets are taking every bit of good news and running with it.”

JPMorgan’s chief Jamie Dimon told Fox Business that rate hikes might need to go beyond what’s currently expected, but he’s in favor of a pause to see the full impact of last year’s increases. Billionaire Paul Tudor Jones likened Powell’s war against inflation to an attempt at a perfect moon landing, saying the Fed chair is facing the most-challenging economic environment in 40 years. 

If he succeeds, stocks could climb 7 per cent to 8 per cent this year, but if inflation worsens he’ll need to continue raising rates, increasing the risk of a downturn, Jones told CNBC.

“What the Fed is communicating has been the subject of extensive and exhaustive debate for much of the last year and they’re in a little bit of a tough spot,” said Olga Bitel, global strategist at William Blair.

To Mark Haefele at UBS Global Wealth Management, markets may have moved too quickly to position for an inflection in Fed policy. That means “conditions are not yet in place for a sustained equity rally,” he added.

Bank of America Corp. clients sold US$1.4 billion of U.S. stocks in the biggest weekly outflow since November, the firm’s strategists including Jill Carey Hall wrote. All three client groups — hedge funds, retail and institutional investors — were net sellers.

As the critical earnings season is due to begin on Friday, sentiment among analysts on the broader S&P 500 has soured to a point seen few times before. 

Over the past three months, analysts’ net downgrades to profit estimates for S&P 500 stocks over the next two years have risen to 32 per cent of total changes, data compiled by Goldman Sachs Group Inc. show. Outside of 2008 and the pandemic rout of 2020, that’s the most negative reading since Goldman started tracking the data in 1998.

Key events this week:

• ECB Governing Council members speak at Euromoney conference in Vienna, Wednesday
• U.S. CPI, initial jobless claims, Thursday
• St Louis Fed President James Bullard at Wisconsin Bankers Association virtual event, Thursday
• Richmond Fed President Thomas Barkin speaks at VBA/VA Chamber, Thursday
• China trade, Friday
• U.S. University of Michigan consumer sentiment, Friday
• Citigroup, JPMorgan, Wells Fargo report earnings, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.7 per cent as of 4 p.m. New York time
• The Nasdaq 100 rose 0.9 per cent
• The Dow Jones Industrial Average rose 0.6 per cent
• The MSCI World index rose 0.3 per cent

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro was little changed at US$1.0736
• The British pound fell 0.3 per cent to US$1.2150
• The Japanese yen fell 0.3 per cent to 132.24 per dollar

Cryptocurrencies

• Bitcoin rose 1.7 per cent to US$17,465.79
• Ether rose 1.7 per cent to US$1,340.62

Bonds

• The yield on 10-year Treasuries advanced seven basis points to 3.61 per cent
• Germany’s 10-year yield advanced eight basis points to 2.31 per cent
• Britain’s 10-year yield advanced three basis points to 3.56 per cent

Commodities

• West Texas Intermediate crude rose 0.5 per cent to US$74.97 a barrel
• Gold futures rose 0.2 per cent to US$1,882.10 an ounce