Stocks Rise as Investors Consider Latest Inflation Data

U.S. stocks rose Friday, boosted by hopes that inflation is moderating. This put them on track for strong weekly gains.

The major indexes slipped at the open, but later turned higher. The S&P 500 was recently up 0.3%. The Nasdaq Composite rose 0.9%, and the Dow Jones Industrial Average edged up 0.2%.

All three major U.S. indexes are on track for strong weekly gains. The S&P 500 has added 2.4%, while the Nasdaq Composite has jumped 4%. The Dow has risen 1.9%.

January's stock market rally has continued into February, with major indexes rising from their end-of-2022 levels. This calm period follows a year of wild swings in the market.

There has been a major shift in assets from stocks to bonds to cryptocurrencies, with investors rushing into the most speculative corners of the market. Parts of the market that Wall Street had bet against have soared in recent months. Tesla, which had a tough year in 2020, has jumped about 40% in January. The 10-year Treasury yield has fallen while bond prices have rallied.

Many investors appear to be feeling more optimistic, thanks in part to signs that inflation is easing up and the economy isn't deteriorating as quickly as some had feared.

Dev Kantesaria, founder of Valley Forge Capital, is optimistic about the state of the economy. "Inflation is improving across the board," he said.

Mr. Kantesaria said that, in his opinion, the direction of interest rates is more important than earnings results in terms of stock returns. He believes that the Federal Reserve will eventually have to cut interest rates, which he thinks will be positive for the stock market.

When the Federal Reserve's policy makers meet next week, they are expected to raise interest rates at a milder pace. The expectation for less-aggressive rate rises has helped push stocks higher, with the S&P 500 up more than 5% this year through Thursday's close.

Investors are assessing how a fresh batch of economic data is likely to impact central-bank policy through the course of this year. The Fed raised interest rates seven times last year in an effort to slow economic growth and curb inflation. While inflation has shown signs of moderating, officials are focused on ensuring it continues to decline.

Sebastian Mackay, a multiasset fund manager at Invesco, said that given the magnitude and persistence of inflation, Fed policy makers "no longer have the luxury of being able to look forward the way that they used to do."

Mr. Mackay believes that central bankers will want to see further data indicating easing inflationary pressure before pausing rate increases.

The Commerce Department released data on Friday showing that the personal-consumption expenditures price index, excluding food and energy, rose 0.3% in December from a month earlier, and 4.4% compared with a year earlier. The gauge of inflation is closely watched by the Fed. The statistics also showed that U.S. households cut spending in December, adding to signs of an economic slowdown.

Data released on Thursday showed that U.S. economic growth slowed less than expected in the fourth quarter of 2022. The data also showed that the U.S. labor market remains strong.

Despite concerns about inflation, many investors are betting on riskier corners of the market in hopes of seeing some momentum in the stock market.

Carvana shares were up around 10% in trading on Friday. The company is among the most-shorted stocks on Wall Street, according to S3 Partners. Coinbase shares were up 13% on Friday, bringing their gains for the year to almost 70%.

"I still believe there is excessive speculation in the market," Mr. Kantesaria said.

Corporate earnings continued to drive outsize moves this week. Intel stock sank 7.9% after the chipmaker reported a larger-than-expected quarterly loss late Thursday. Hasbro, the toy and games company, also declined after it reported lower revenue and became the latest corporation to outline large-scale layoffs.

American Express reported lower profit for the fourth quarter, but its shares still rose by about 12%. The credit-card company attributed this to its plans to boost its quarterly dividend. Chevron's shares, on the other hand, edged down by 5% despite the oil company reporting record annual profit for last year.

Some analysts and investors are more cautious about the latest rally. Matt Rowe, senior portfolio manager at Nomura Private Capital, said that many investors entered the year bearish on stocks and may be chasing the market higher in recent weeks.

Mr. Rowe believes that much of the rally is due to positioning. He thinks there are many reasons why the rally has gone too far too quickly.

In the bond market, the yield on the benchmark 10-year Treasury note increased to 3.546% in recent trading, from 3.491% on Thursday. Yields and prices move inversely, so this increase in yield indicates a decrease in price.

Brent crude, the international benchmark for oil prices, fell 1.9% to $85.60 a barrel. This is a significant drop in energy markets.

In Europe, the Stoxx Europe 600 index edged down 0.2%.

Some major indexes in Asia closed with gains. South Korea's Kospi Composite added 0.6%, and Hong Kong's Hang Seng Index rose 0.5%. Markets in mainland China were closed for a holiday.

The benchmark Nifty 50 index in India fell to a three-month low, as allegations by a U.S. short seller continued to weigh on stocks linked to Gautam Adani, the country's richest man.