Stocks are volatile after US prices fall in December

A soft landing looked unlikely a just few months ago. Now, there are more and more believers.

“The odds of a soft landing are increasing. That is the most likely scenario now,” Apollo Global chief economist Torsten Slok told CNN by phone on Thursday.

The December inflation report – which showed consumer prices increased at the slowest annual pace in 14 months – may give the Federal Reserve cover to stop slamming the brakes on the economy.

And the less the Fed needs to raise interest rates, the better the chance the economy avoids recession. “I do think the Fed must be pleased with inflation beginning to slow down,” Slok said.

Investors have sharply marked up their bets that the Fed will slow the pace of interest rate hikes at its next meeting to a quarter of a percentage point.

The Apollo economist cautioned, however, there may still “be bumps along the way.”

Other economists are sticking by their recession calls. Dana Peterson, chief economist at The Conference Board, told CNN that a “short, shallow” recession is still likely based on the Fed’s “astounding” increase in borrowing costs over the past year.

“The ingredients are still there,” said Peterson. “It’s really going to be up to the consumer. The problem is layoffs are on the six o-clock news and consumers may start to worry and pull back on spending.”

US stocks were up again Thursday, following the news that the year-over-year increase in consumer prices slowed to 6.5% in December. Prices even fell slightly from November.

Stocks have enjoyed a solid start to 2023, largely due to hopes that a cooling off in inflation will allow the Federal Reserve to reduce the size of its interest rate hikes and possibly pause by midyear. (The Fed will announce its next rate decision on February 1 after a two-day meeting.) The Nasdaq is on a five-day winning streak and traded above the 11,000 level for the first time since December 15. 

The market's next test? Corporate earnings are right around the corner. Banking giants JPMorgan Chase (JPM), Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC) report fourth quarter results Friday morning. So do asset management titan BlackRock (BLK) as well as Dow component UnitedHealth (UNH) and Delta Air Lines (DAL). 

The Dow rose more than 215 points, or 0.6%.

The S&P 500 was up 0.3%.

The Nasdaq Composite gained 0.6%.

As stocks settle after the trading day, levels might still change slightly.

Just last week, Bed Bath & Beyond warned that it was on the brink of bankruptcy — but you wouldn't know that by looking at the retailer's stock.

Shares soared more than 45% Thursday to above $5. That's about 260% higher than its Friday closing price of $1.31.

The company recently reported that it lost a third of its sales in last year's holiday run-up and that it would close more stores and lay off corporate employees in a bid to cut costs and stay afloat. The company's management also said in a Securities and Exchange Commission filing that it was considering bankruptcy.

Bankruptcy isn't a good thing for shareholders, who are typically the last to be paid out if a company goes out of business. In many cases, they don't get anything at all.

But investors appear to be betting that the retailer will somehow avoid that fate, and their bets are catapulting the stock upwards.

That speculation could also be triggering a short squeeze, which occurs when a stock moves higher and short sellers decide to cover their short positions or are forced to do so by margin calls.

Bed Bath & Beyond has been heavily shorted, meaning investors are betting the stock will go down — it's currently the second most shorted stock trading in the US, behind Carvana.

As short sellers buy the stock, the price increases, creating even more of a squeeze.

It took a couple of hours, but Wall Street finally seems to realize that the slowdown in inflation is a good thing for the economy. Stocks neared their highest levels of the day with a little less than three hours to go in the trading session.

The US government said Thursday that consumer prices rose "just" 6.5% over the past months through December, and prices actually fell slightly from November. That's led investors to speculate that the Federal Reserve will raise rates by only a quarter of a percentage point early next month...and that the Fed may pause soon after that.

The Dow rose nearly 300 points, or 0.8%, in midday trading.

The S&P 500 was up 0.6%. 

The Nasdaq Composite gained 0.7%.

The Fed's days of three-quarter-point rate hikes are behind us, said Philadelphia Federal Reserve President Patrick Harker in a blog post Friday.

The better-than-expected inflation data that showed prices fell in December indicates that the Fed's efforts to slow the economy and tame inflation are finally working. And it means that rate hikes will still occur over the course of the year -- but not at the same pace, Harker said.

The White House celebrated positive economic news Thursday but stopped short of calling the drop in overall inflation a trend. 

“It's good news and it's certainly encouraging the trend that we are hoping to see,” Brian Deese, director of the National Economic Council, told CNN on Thursday morning, reacting to the latest Consumer Price Index data. 

He added the administration still has “more work to do,” but said that one of the most encouraging parts of the news was that key pieces of legislation aimed at lowering inflation won’t go into effect until later this year. 

“One of the important parts on the policy side is that some of the most important policy we worked to pass and enact last year, the biggest impact, whether that's infrastructure, investment in manufacturing, or lowering costs of energy and prescription drug prices, is going to kick in in the first half of 2023,” he said.

Echoing Biden’s comments earlier Thursday, Deese blamed an increase in the price of eggs on the Avian Flu and said it was something “we’re going to have to work on” but “can’t control.” 

New car prices are finally starting to tick a little lower after a string of increases brought them to record levels.

The Consumer Price Index, the government’s key measure of inflation, showed new car prices fell 0.1% in December compared to November. It’s the first decline in that measure since January 2021. As recently as August, new car prices were posting a 0.8% one-month gain.

With that modest decrease, new car prices have risen 5.9% over the last 12 months, far less than the 7.2% 12-month rise reported in November.

The biggest reason for the drop, according to experts, is greater inventory on dealer lots. That has reduced the need for buyers to pay above the manufacturer’s suggested retail price, or sticker price, as they were forced to do much of the year in order to get the new car they wanted.

Data from Edmunds shows that buyers paid an average of $48,516 for a new car in December, about $300 less on average than the MSRP on the cars or trucks they were buying. A year ago they were paying $700 more than sticker price, on average.

Used car prices have also been falling for much of the last year. In December they posted a 2.5% one-month drop and an 8.8% drop compared to the end of 2021.

Wall Street appears to have a case of CAT scratch fever. Shares of Caterpillar (CAT) were up more than 2% Thursday, hitting a new record high in the process. Analysts at JPMorgan raised their price target on Caterpillar Thursday, helping to give the stock a boost.

Caterpillar's stock has already gained 7% this year and has soared nearly 40% in the past three months.

That could be very encouraging news for all investors.

Caterpillar is a global economic bellwether, selling its construction and mining equipment to companies around the world. More than half of Caterpillar's overall sales in the third quarter came from international markets...and a big chunk of that was from areas rich with commodity resources in Latin America and Asia.

The company will report its fourth-quarter results on January 31. Wall Street is expecting continued success, with revenue forecast to rise 16.5% and earnings per share estimated to surge nearly 50%.

It may be a topsy-turvy day for stocks. But so far this year, the bulls have returned to Wall Street. The major market indexes are all sporting solid gains...and investor sentiment has made a marked turn for the better. How do we know? CNN's own Fear & Greed Index, which measures seven indicators of market sentiment, is back in Greed terrirtory.

The index was showing signs of Fear not that long ago. After all, stocks are coming off their worst year since 2008.

But while 2022 might have been all about worries of inflation and supersized Federal Reserve rate hikes causing a major recession, investors now appear to be hoping that price pressures are abating and that the US economy may either experience a soft landing or just a mild, brief downturn.

Falling long-term rates are also helping. The yield on the 10-year Treasury bond tumbled to around 3.5% Thursday after peaking at 4.3% in October. The 10-year has a big impact on mortgage rates. So investors are hoping the drop in yields could reignite demand for housing.