Wall Street closes higher as inflation data supports Fed bets

By Bansari Mayur Kamdar, Shreyashi Sanyal and Sinéad Carew

(Reuters) - U.S. stock indexes rose on Wednesday after data showed that while U.S. inflation was at its highest in decades, it largely met economists' expectations, easing some fears that the Federal Reserve would have to pull back support even more forcibly than already expected.

Data from the Labor Department showed the consumer price index (CPI) increased 0.5% last month after rising 0.8% in November, while in the 12 months through December, the CPI surged 7.0% to its highest year-on-year rise in nearly four decades.

Economists polled by Reuters had forecast a CPI gain of 0.4% for December and 7.0% on a year-on-year basis.

"Investors were bracing for even hotter in inflation than what we actually saw. As bad as the number is and as much inflationary pressure that's in the economy there was a little relief in that," said Anthony Saglimbene, Ameriprise Financial (NYSE:AMP)'s global market strategist in Troy, Michigan.

"Today's inflation report validates the Fed trajectory and means they don't have to be any more aggressive than is already priced in."

The central bank's plan for easing accommodation to fight inflation includes raising interest rates, which analysts expect to start as soon as March, as well as tapering its bond buying program and reducing its asset holdings.

For most stock sectors it also helped that longer-dated U.S. Treasury yields dipped on Wednesday. In recent weeks, sharp gains in the U.S. 10-year yield had weighed on stocks, particularly in rate-sensitive growth sectors like technology.

"The fact that bond market yields are standing down is probably a signal for equity investors to take on a little more risk today," said Jack Ablin, chief investment officer at Cresset Capital Management in Chicago.

But with small cap indexes such as the Russell 2000 underperforming during the session, Ablin saw some caution.

"Equity investors still want quality. It's not a free-for-all," Ablin said.

According to preliminary data, the S&P 500 gained 12.70 points, or 0.27%, to end at 4,725.77 points, while the Nasdaq Composite gained 34.27 points, or 0.23%, to 15,187.72. The Dow Jones Industrial Average rose 44.59 points, or 0.12%, to 36,296.61.

Growth and technology stocks have been staging a comeback this week, with investors watching a variety of metrics to decide whether to buy the rally or brace for more declines.

Also on the watchlist for this week is the unofficial kick-off of the fourth quarter earnings season with JPMorgan Chase & Co (NYSE:JPM), Citigroup Inc (NYSE:C) and Morgan Stanley (NYSE:MS) due to report their results on Friday.

"Earnings may exceed expectations and that is what is keeping investors active despite knowing that the Fed is going to start tightening in the next several months," said Eric Schiffer, chief executive officer of California-based private equity firm Patriarch Organization.

"You'll also see less commentary on earnings calls referencing supply chain constraints this season."

In sectors like air travel, however, surging cases of the Omicron variant of the coronavirus could dampen earnings expectations, with analysts at Bank of America (NYSE:BAC) reckoning that the pandemic's impact on corporate travel is the biggest risk to the airline industry.

The healthcare index, was weighed down by shares of drugmaker Eli Lilly (NYSE:LLY) and Biogen (NASDAQ:BIIB) throughout the day.

The U.S. government Medicare program said that while it plans to cover Biogen's Aduhelm Alzheimer treatment it will require patients to be enrolled in a clinical trial, limiting access to the medication. This could also impact Eli Lilly, which is developing similar drugs.