Dow jumps 150 points to new record after inflation report is not as bad as feared

Stocks rose on Wednesday after inflation jumped, but not by quite as much as investors feared when stripping out volatile food and energy prices.

The Dow Jones Industrial Average gained about 150 points, or 0.45%, to reach a new intraday record. The S&P 500 rose 0.2% to an intraday high. The Nasdaq Composite gained 0.1%, as interest rates gave up their gains.

The 10-year Treasury yield turned flat following the report, giving up an earlier gain and trading around 1.344%.

July’s Consumer Price Index released Wednesday showed prices jumped 5.4% since last year, compared to expectations of 5.3%, according to economists surveyed by Dow Jones. The government said CPI increased 0.5% in July on month-to-month basis.

But investors were concentrating on the core rate of inflation. CPI, excluding energy and food prices, rose by 0.3% last month, below the 0.4% increase expected. Core prices still jumped 4.3% on a year-over-year basis.

“It’s encouraging to see the pace moderating a bit month over month supporting the notion that recent price increases are transitory and reopening related. So while inflation continues to run hot, it’s likely that investors are already pricing it in,” said Mike Loewengart, managing director of investment strategy at E*TRADE Financial.

Used car prices, which investors have been watching as one sign of out-of-control inflation, rose just 0.2% in July after surging more than 10% in the prior month.

The data “should help assuage investor fears that the Fed is too laid-back about inflation pressures, ” said Seema Shah, chief strategist at Principal Global Investors. “The details of the data release suggest some easing in the reopening and supply-shortage driven boost to prices, and tentatively suggests that inflation may have peaked. Investors in the transitory camp will feel slightly vindicated.”

Oil prices dropped Wednesday after the White House called on OPEC and its allies to increase oil production to support the global recovery from the pandemic. Futures contracts for West Texas Intermediate crude fell by more than 1% to about $67.44 per barrel. European benchmark Brent crude also slipped by more than 1% to about $69.85 per barrel.

Shares of Southwest Airlines ticked 2% lower after lowering its third quarter operating revenue guidance, citing the Delta variant. American Airlines and United Airlines also slipped after the opening bell.

On Tuesday, the Dow and S&P 500 closed at record highs following the Senate passing the $1 trillion infrastructure bill. The legislation earmarks $550 billion in new spending for areas including transportation and the electric grid. The Nasdaq Composite slid 0.49% on Tuesday, registering its second negative session in the last three. The dip came as treasury yields advanced, weighing on growth-oriented areas of the market.

The march to record highs for stocks comes despite Covid case numbers rising in the U.S. and around the world.

“Widespread vaccine distribution and distancing measures have helped limit the variant’s impact, but we could still see some drag on economic growth as some restrictions are reintroduced and consumers potentially become more cautious,” said Barry Gilbert, asset allocation strategist at LPL Financial. “While we may see an increase in market volatility due to the Delta variant, we believe the S&P 500 is still likely to see more gains through the end of the year,” he added.

Earnings season continues on Wednesday with Wendy’s and Canada Goose among the names set to report prior to the opening bell. Lordstown Motors, eBay and Bumble are on deck for after-hour closes.

Through Friday, 87% of the S&P 500 companies that reported quarterly results have beat earnings estimates. The same percentage of companies beat revenue estimates during that timeframe.

“There’s been a lot to take in these last few weeks; major earnings, a hawkish Fed and some knockout economic readings,” said Craig Erlam, senior market analyst at Oanda. “Everything it seems is now pointing towards the Fed tapering its asset purchases in the coming months, with delta the only things potentially standing in its way as it spreads across the US (and many other countries).”

— with reporting from CNBC’s Yun Li.