Stocks rise as traders make last moves before inflation data

NEW YORK — U.S. stocks rallied Wednesday as investors locked in their final moves ahead of a highly anticipated report on inflation, one that could show whether Wall Street’s rising optimism recently has been warranted or overdone.

The S&P 500 climbed 1.3% for its second straight gain before Thursday morning’s inflation data. The Dow Jones Industrial Average rose nearly 269 points, or 0.8%, while the Nasdaq composite gained 1.8%.

The S&P 500 gained 50.36 points to 3,969.61 Wednesday. The Dow rose 268.91 to 33,973.01, and the Nasdaq climbed 189.04 to 10,931.67.

Stocks started 2023 with gains on hopes that cooling inflation and a slowing economy may get the Federal Reserve to ease off its sharp interest rate hikes. Such increases can help stamp out high inflation but also slow the economy and raise the risk of a recession while hurting prices for stocks and other investments.

Economists expect Thursday’s report to show inflation is continuing to cool from its summertime peak, down to 6.5% last month from 7.1% in November and from more than 9% in June. The hope on Wall Street is that such a trend could convince the Fed to soon halt its rate increases, many of which were triple the usual amount.

Some investors are even betting the Fed will cut interest rates in the second half of this year to help prop up an economy that’s beginning to show pockets of weakness because of past rate hikes.

“One real thing I think underpinning the market is simply the fact that the market doesn’t believe the Fed when they say they’re going to keep hiking this year,” said Brad McMillan, chief investment officer for Commonwealth Financial Network.

Of course, if Thursday’s data and other reports don’t show inflation is improving as much as expected, it could mean the Fed would have to get tougher on interest rates.

The Fed said it plans to raise its key interest rate further and keep rates high for a while to ensure inflation is really beaten down. It does not envision any rate cuts this year, and even said any “unwarranted” rallies on Wall Street “driven by a misperception” would make the mission of returning inflation to normal more complicated.

Recently, though, Wall Street has been looking through such pronouncements.

Treasury yields have been easing off their recent highs, in part on expectations for an easier Fed.

The yield on the two-year Treasury, which tends to track expectations for Fed action, dipped to 4.22% from 4.24% late Tuesday. The 10-year Treasury yield, which helps set rates for mortgages and other important loans, fell to 3.53% from 3.61%.