U.S. stocks climb as bond yields pull back, investors digest hot inflation report

So far, the S&P 500 has slumped 3.5% in the third quarter and lost more than 23% since the start of the year.

What’s driving markets

In keeping with the historical pattern, U.S. stocks suffered during the month of September as an assertive Federal Reserve helped push Treasury yields and the dollar higher, which in turn undermined equity valuations.

See: It’s the worst September for stocks since 2008. What that means for October.

But as the month drew to a close on Friday, investors focused on the personal consumption expenditure inflation index for August, which showed that core consumer prices climbed by 0.6% last month, more than Wall Street’s forecast of 0.5%. The core inflation measure excludes volatile food and energy prices.

See: Cheaper gas holds down inflation, PCE shows, but the cost of everything else is still going up fast

The reading largely confirmed similar data from the consumer-price index, another closely watched inflation barometer, which sent stocks reeling lower earlier this month when it showed that inflation in August was hotter than expected. However, inflation data in the U.S. remained comparatively better than similar reports out of Europe, which showed that consumer-price inflation in the bloc hits a new record level in September.

See: Eurozone Inflation posts new record high of 10.0% in September

Art Hogan, chief market strategist at B.Reily Wealth, said “all eyes were on the PCE number” Friday morning.

“Clearly, the market needs to see inflation inputs improve, but that wasn’t the case in August,” he said.

While the hotter-than-expected inflation typically weighs on stocks, markets got a break on Friday as Treasury yields pulled back, helping to offset some of the pressure on stocks.

“If you look at the yield curve, we’re finally seeing some pullback both in the 2s and the 10s,” Hogan said.

Hogan added that stocks could remain volatile as investors adjust positioning on the final trading day of the month, and the third quarter.

The yield on the 2-year Treasury
TMUBMUSD02Y,
4.146%
was marginally higher at 4.179%, while the 10-year yield
TMUBMUSD10Y,
3.732%
was marginally lower at 3.744%. Yields climbed to their highest levels of the cycle earlier this week, with the 10-year briefly topping 4% for the first time since 2008.

This week has also been a busy one for senior Fed officials, who have been bombarding investors with commentary about the Fed’s plans for raising interest rates and combating inflation. On Friday, Vice Chair Lael Brainard reiterated that the Fed would keep interest rates elevated to combat inflation, even if it harms the economy.

See: Fed won’t pull back from rate hikes prematurely, Brainard says

Since it will take time for high interest rates to bring inflation down, Brainard said the Fed is “committed to avoiding pulling back prematurely.”

Outside the U.S., the beleaguered British pound
GBPUSD,
+0.06%
rose above pre mini-budget crisis levels earlier in the day, helped by Wednesday’s decision to buy long-dated gilts, as well as a decision by the U.K. government to meet with the country’s independent budget forecasters. However, the pound was once again on the backfoot, down 0.8% to $1.1035.

Investors were also keeping an eye on megacap tech stocks. Apple Inc. AAPL was trading down 0.6% on Friday after leading markets lower a day earlier following a downgrade by Bank of America. Meta Platforms META was up 1.6% after announcing a hiring freeze.

Need to know: Here’s why investors should start betting on Apple and the stock market now

In other economic data news, a final reading on the University of Michigan consumer-sentiment index for September showed consumers’ view of the economy improved somewhat during the month due to falling gas prices, even as their outlook remained broadly pessimistic.

See: U.S. consumers remain pessimistic about economy even as inflation fears wane

Stocks in focus

• Shares of Nike Inc.
  NKE,
  -11.49%
  tumbled 11% after executives at the sportswear maker said price cuts to clear stockpiles from warehouses in North America would dent gross margins for the rest of the fiscal year. Analysts were raising red flags and cutting prices targets on the stock.

• Micron Technology
  MU,
  +2.62%
  stock rose after a report that Japan will grant it a $320 million subsidy to make advanced memory chips at its Hiroshima plant.  That came a day after Micron posted quarterly earnings that included a forecast for a loss in the coming quarter and plans to scale back a build out of capacity.

— Barbara Kollmeyer contributed to this report