Stock futures traded higher Friday morning, with the S&P 500 looking to build on record levels, as investors looked beyond a hotter-than-expected report on inflation.
Contracts on the S&P 500 gained 0.2%. Contracts on the Dow and Nasdaq were up by a similar margin. The 10-year yield dipped back below 1.5%.
The Bureau of Labor Statistics reported on Thursday that its headline consumer price index rose by 5.0%, or by the most since 2008, in May. Core consumer prices, which exclude volatile food and energy prices, surged at the fastest rate since the 1990s, extending gains after an already strong April report.
U.S. stocks reacted less negatively to the report than they had in April, however, with the S&P 500 jumping to a new record high.
“The inflation outlook has rightfully been top of mind since last month’s blowout report,” LPL Financial Chief Market Strategist Ryan Detrick said in a note Thursday. “Under the hood, though, we think the picture is a bit more sanguine than the headlines would suggest, and still believe inflation will be relatively well-contained over the intermediate-to-long term.”
Investors have taken into account recent commentary from Federal Reserve officials around inflation. Many have said they see price increases as only transitory jumps off last year’s pandemic-depressed lows, and have telegraphed a willingness to tolerate a period of above-target – or above 2% – inflation following years of undershooting. Next week’s Federal Reserve policy decision may help further reaffirm this stance, and solidify that the central bank still believes the economy has a ways to go in recovering from the pandemic before the Fed moves to adjust its pull back on its quantitative easing program or raise rates.
“I think that investors may have had some concern that if inflation was too hot that there would be fears of Fed tightening and a real significant tightening of financial conditions and that would weigh on equities,” Brian Levitt, Invesco global market strategist, told Yahoo Finance. “I would argue that it’s a market that’s saying, yea it’s inflationary, it’s not going to get out of hand. You may see some steps to normalize policy over time.”
“I think what we’ll find as the year progresses is that growth is strong, there is some pricing pressure, but the Fed’s going to let it run … and cyclically, rates should move higher from here. That’s not to say that rates are going to 2.5% or 3%,” he added. “We’re still going to be in a structurally low interest rate environment, probably for a lot of the rest of our careers if not the rest of our lives. But cyclically, I don’t see why rates shouldn’t move higher in an improving growth backdrop in which the Fed is telling us that they’re not going to be raising short rates for a while.”
8:53 a.m. ET: ‘We don’t expect higher inflation to derail U.S. equities’: Economist
Concerns around inflation and higher rates have come down significantly among equity investors, with markets trading at record highs even as core consumer price inflation surged to a multi-decade high. Stock investors will likely be able to continue looking past even lasting price increases, some economists said.
Video: Stocks slip as inflation jitters linger (Yahoo! Finance)
“We don’t expect higher inflation to derail U.S. equities,” Capital Economics markets economist Franziska Palmas wrote in a note Friday morning. “While we think that inflation in the U.S. will prove more persistent than both the Fed and investors appear to anticipate, we still expect the S&P 500 to make some further gains over the next couple of years.”
“Two factors explain this in our view. First, signs of rising inflation have not sparked a reassessment of the outlook for monetary policy,” Palmas said. “This is largely because the Fed has stressed that it thinks this increase in inflation will be transitory and that it therefore won’t act on it. Investors seem to believe this.”
“Second, rising prices and shortages haven’t raised significant concerns about the economic recovery among investors so far,” she added. “S&P 500 earnings forecasts for the next few years have continued to be revised up.”
7:25 a.m. ET Friday: S&P 500 looks to add to record levels
Here’s where markets were trading Friday morning:
S&P 500 futures (ES=F): 4,244.75, +6.75 points (+0.16%)
Dow futures (YM=F): 34,540.0, +79 points (+0.23%)
Nasdaq futures (NQ=F): 13,988.50, +28.75 points (+0.21%)
Crude (CL=F): +$0.35 (+0.50%) to $70.64 a barrel
Gold (GC=F): -$5.90 (-0.31%) to $1,890.50 per ounce
10-year Treasury (^TNX): -1.2 bps to yield 1.447%
7:52 p.m. ET Thursday: Stock futures trade near the flat line
Here’s where markets were trading Thursday evening:
S&P 500 futures (ES=F): 4,238.75, +0.75 points (+0.02%)
Dow futures (YM=F): 34,459.00, -2 points (-0.01%)
Nasdaq futures (NQ=F): 13,968.25, +8.5 points (+0.06%)
Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
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