US Stocks Finish Mixed with NASDAQ Surprisingly Higher Despite Yields Rise

The major U.S. stock indexes finished mixed on Tuesday in a volatile trade as investors assessed the impact of the latest U.S. consumer price data on Federal Reserve interest rate policy throughout the session.

The choppy price action essentially reflected the U.S. consumer price report which showed a rise in the CPI in January, but a dip in the annual rate. At the end of the session, all we could conclude was that inflation remains elevated, but it’s also slowing.

The market seems to have concluded that the January data offered little to change expectations about the Fed’s path forward on interest rate hikes. This likely means investors are pricing in two more Fed rate hikes in March and June with the central bank’s terminal rate coming in at about 5.28% in July.

However, investors should expect much of the same choppy trade moving forward as they become more dependent on fresh economic data and Fed speakers to guide them.

In the cash market on Tuesday, the blue chip Dow Jones Industrial Average settled at 34089.27, down 156.66 or -0.46%. The benchmark S&P 500 Index finished at 4136.13, down 1.16 or -0.03% and the tech-heavy NASDAQ Composite closed at 11960.15, up 68.36 or +0.57%.

Gains Capped by Rise in Treasury Yields

The stock market struggled throughout the session on Tuesday with gains likely capped by a rise in U.S. Treasury yields.

The 10-year and the 2-year Treasury yield rose as investors digested the latest consumer price index report and assessed the Federal Reserve’s tightening path. But the biggest surprise was the rise in the 6-month Treasury yield which surged to 5.022%, a level it hasn’t closed at or above since July 2007.

Fed Speakers Add to Investor Angst

While most of the focus was on January U.S. consumer inflation data some investors were already moving forward. They were likely driven by hawkish remarks by Richmond Fed President Thomas Barkin and Dallas Fed President Lorie Logan.

Speaking at Prairie View A&M University near Houston, Texas, Logan said that with an “incredibly strong” labor market pushing up wages and keeping inflation elevated, the Fed should not lock in a stopping point for rates just yet.

“We must remain prepared to continue rate increases for a longer period than previously anticipated, if such a path is necessary to respond to changes in the economic outlook or to offset any undesired easing in conditions.”

Short-Term Outlook

Looking ahead, investors will closely watch January retail sales data on Wednesday for hints on consumer spending amid worries of an economic slowdown.

Core Retail Sales data is expected to show a monthly increase of 0.9%, better than the previously reported -1.1% in December. Month-over-month retail sales are expected to come in at 1.9%.

The Empire State Manufacturing Index is expected to show an improvement from -32.9 to -18.2.

Stock market investors are likely to show a strong reaction to the retail sales data since the consumer is a strong force driving the economy. Weak data could mean the economy is on path toward recession.