Stock Market Today: Markets Close Mixed on Inflation Data

Stocks caught a tailwind from an inflation reading that keeps the Federal Reserve on track to leave interest rates unchanged at the next Fed meeting. 

August consumer prices rose 3.7% on an annual basis, we learned Wednesday, driven partly by a spike in gasoline prices. But core prices, which exclude volatile food and energy costs and are considered to be a better indicator of future prices, continued to moderate.

Rate-sensitive growth stocks were special beneficiaries of the benign inflation data, with a number of tech and communications services mega-cap stocks adding many tens of billions of dollars in value on Wednesday. 

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Economic data in the form of the August Consumer Price Index (CPI) dominated sentiment early in the session. Higher gas prices caused headline inflation to pick up sharply last month, but a moderating pace of underlying inflation should keep the Federal Reserve on track to leave interest rates unchanged at the next Fed Meeting, experts say.

Prices rose 0.6% in August after increasing just 0.2% the prior month, the Bureau of Labor Statistics said Wednesday. The index for gasoline was the largest contributor to the monthly all items increase, accounting for over half of the increase, the BLS noted. Also contributing to the uptick in inflation was the shelter component, the index of which rose for a 40th consecutive month. 

Although the 0.6% rise in monthly headline inflation matched economists' expectations, August's annual inflation rate of 3.7% exceeded expectations for a 3.6% gain. 

Core inflation, which strips out volatile food and energy prices and is considered to be a better predictor of future prices, continued to moderate, although pockets of "stickiness" remain. Core CPI rose 0.3% in August, or higher than economists' forecast for 0.2% growth. On an annual basis, core CPI increased 4.3%, which matched estimates.

The August CPI report adds to the evidence that the Fed's efforts to combat inflation by cooling a squeaky-tight labor market via an aggressive campaign of interest rate hikes is having an effect. But it also tends to increase the odds of a Fed rate hike later in the year, experts say. 

"The still relatively moderate core inflation reading for August – the third month in a row – combined with the cooling labor market seen in the August payrolls report likely seals the deal for a rate-hike pause at the September FOMC meeting," says Scott Anderson, chief U.S. economist at BMO Capital Markets. "That said, with the uncomfortable rise in headline inflation and continued rise in oil prices to near $90 per barrel, the Fed will likely want to still keep another rate hike on the table if the inflation moderation we have seen this summer doesn't continue."

Mega-caps pace the day's gains

For now, interest rate traders assign a 97% probability to the Federal Open Market Committee (FOMC) leaving interest rates unchanged when it meets next week. As much as a pause in rate hikes should already be priced in, certain massive, rate-sensitive stocks still took off Wednesday as if to celebrate the news.

Mega-cap stocks throwing their weight around the indexes included Amazon.com (AMZN), Tesla (TSLA), Microsoft (MSFT), Nvidia (NVDA) and Meta Platforms (META), shares of which added at least 1% to more than 2%. Microsoft alone added about $30 billion in market capitalization on Wednesday. Nvidia added about $16 billion in market value.

Meanwhile, shares of Softbank-owned Arm are expected to start trading Thursday in the biggest initial public offering of the year. Arm is targeting a market capitalization of as much as $54.5 billion when its American depositary shares begin trading September 14 under the ticker ARM on the Nasdaq Global Select Market.

With so many mega-caps pacing the Nasdaq Composite, the rate-sensitive, tech-heavy index added 0.3% Wednesday to finish at 13,813. The broader S&P 500 rose 0.1% to 4,467, while the blue-chip Dow Jones Industrial Average slipped 0.2% to 34,575. 

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