U.S. stocks attempt to nudge higher as investors weigh Fed response to persistent inflation

What’s driving markets

Stocks opened with a modest push to the upside, but saw early gains trimmed after the University of Michigan’s preliminary February gauge of consumer sentiment fell to 61.7, from January’s level of 67.2, the lowest reading since October of 2011. Economists were expecting a reading of 67, according to economists surveyed by The Wall Street Journal.

Also, the survey found expectations for inflation over the next year rose to 5% from January’s expectation of 4.9%, the highest level since July of 2008, while inflation expectations over five years held steady at 3.1%.

Meanwhile, Thursday’s developments continued to reverberate. The Labor Department reported that consumer prices jumped 7.5% in the 12 months ending January, as St. Louis Fed President James Bullard talked about his willingness for the central bank to start with a 50-basis point hike in March — or possibly even a rate hike before its next scheduled meeting.

That lifted the 2-year Treasury yield TMUBMUSD02Y, 1.598% by 21 basis points — the largest single-day rise since June 5, 2009.

Other Fed speakers late Thursday played down the prospect of a half-point hike. Richmond Fed President Tom Barkin said he was open to the concept, but questioned whether there was a “screaming need” to do it. “I would have to be convinced on that,” he said at an event, according to Reuters. San Francisco Fed President Mary Daly was quoted as telling Market News International that a half-point move wasn’t her preference.

Some market watchers argued that the market reaction to the inflation data and to Bullard’s comments might have ben overdone.

“The market tends to discount the most hawkish FOMC (Federal Open Market Committee) member in a rising rate environment, but policy is ultimately likely to reflect the median of the whole policy-setting committee,” said Alex Pelle, U.S. economist at Mizuho Securities, in a note.

“The FOMC is likely to seek consensus — both formally and informally — as it lifts rates for the first time in several years. High inflation will weigh on some policy makers’ views, but a flatter curve will give many other policy makers pause, too,” he said.

Jim Reid, a strategist at Deutsche Bank, says it might be increasingly difficult for the U.S. economy to avoid falling into recession.

“With the surging U.S. CPI print yesterday the risks have to be skewed toward the U.S. curve inverting even earlier than that and starting the countdown clock earlier,” he said.

The University of Michigan’s consumer sentiment index for February is due for release at 10 a.m. Eastern, and will include a look at five-year inflation expectations.

Companies in focus

• Under Armour Inc. UAA, -9.52% reported earnings and revenue that topped expectations. Shares of the athletic-apparel company fell nearly 10%.
• Shares of Goodyear Tire & Rubber Co. GT, -23.23% dropped nearly 23% despitereporting a much stronger-than-expected rise in profits.

Other assets

• The yield on the 10-year Treasury note TMUBMUSD10Y, 2.055% fell 0.5 basis point to 2.024%. Yields and debt prices move opposite each other.
• The ICE U.S. Dollar Index DXY, 0.24%, a measure of the currency against a basket of six major rivals, rose 0.2%.
• Bitcoin BTCUSD, -0.42% rose 0.6%.
• Oil futures moved higher, with the U.S. benchmark CL.1, 1.69% up 1.8% at $91.52 a barrel, while gold futures GC00, -0.17% edged down 0.1%.
• The Stoxx 600 Europe Index SXXP, -0.59% fell 0.4%, while London’s FTSE 100 UKX, -0.15% edged down 0.1%.
• The Shanghai Composite SHCOMP, -0.66% fell 0.7%, while the Hang Seng Index HSI, -0.07% shed 0.1% in Hong Kong.