Dow rises 150 points, heads for best month since January on earnings, PCE inflation data

By Isabel Wang and Joseph Adinolfi

US stocks rose on Friday, extending gains for a second day, buoyed by strong gains from the technology sector, although the latest inflation data cemented expectations for another Federal Reserve rate hike next week.

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The Dow Industrials and S&P 500 posted their biggest daily gains since Jan. 6 on Thursday, according to Dow Jones Market Data. The Nasdaq Composite posted its best day since March 16th. On the last trading day of the month, the Nasdaq is the only major US index to post a monthly loss.

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US stock indexes built on Friday’s strong rally from the previous session, as the Dow Industrials and S&P 500 posted their biggest one-day gains since January, thanks to strong results from Facebook parent Meta Platforms Inc. (META), which followed equally optimistic Microsoft Corp Results (MSFT) and Google parent Alphabet Inc. (GOOGL) as big tech earnings this week generally beat Wall Street expectations.

However, Amazon.com’s AMZN earnings, released after the bell on Thursday, helped dampen investor confidence after a string of strong gains by some of America’s largest companies. The e-commerce giant warned late Thursday that revenue growth for Amazon Web Services has slowed in the current quarter

Investors will also be keeping an eye on First Republic Bank FRC after Reuters reported that US officials have started talks with banks and private equity to try to bail out the troubled lender. First Republic shares surged early Friday but reversed gains to trade 38% lower in the afternoon. The San Francisco-based lender has lost more than half of its value since the start of the week, according to Dow Jones Market Data.

Behold: First Republic shares continue their slide as clock ticks on a potential bailout

On the last trading day of the month, the Dow industrials are on track to end April up 2.1%, their best monthly gain since January, while the S&P 500 is heading for a monthly gain of 1.1% and the Nasdaq is up the best way is to end the April month up 0.3% according to Dow Jones Market Data.

See: Inflation barely rising, PCE shows, but core rate is still ‘sticky’

On Friday, the US Federal Reserve’s favorite inflation data showed that the cost of goods and services rose nearly 0.1% in March and the annual inflation rate slowed again in response to higher interest rates and a cooler economy. The annual price increase fell to 4.2% from 5.1% in the previous month. That’s the lowest level since May 2021, although it’s still double the Fed’s inflation target of 2%.

The U.S. labor cost index, the broadest measure of U.S. labor costs, rose 1.2% in the first quarter after rising 1.1% in the last three months of 2022, the Labor Department said on Friday. Compensation rose 4.8% in the 12 months to March, compared with 5.1% in the previous quarter, the highest rate since 1990.

Investors are expecting the Fed to make another 25 basis point rate hike when its two-day policy meeting ends on Wednesday. The CME FedWatch tool points to an 86% chance of a quarter point rate hike.

Ryan Belanger, founder and chief executive of Claro Advisors, a Boston-based wealth management firm, said Friday’s PCE reading, which shows inflation growth slowing in March, was “encouraging news” for the central bank, but price pressures are always there even larger than the central bank’s 2% target.

“It gives the Federal Reserve an excuse to hike interest rates by 25 basis points at the May meeting, despite a growing chorus among investors that the Fed is on hold amid concerns about the economy,” Belanger said.

See: The Fed expects another rate hike, perhaps for the last time in this cycle

Jamie Cox, managing partner at Harris Financial Group, said the economy has just started to see a rapid fall in inflation as it grapples with aggressive rate hikes, credit restrictions and a manufacturing recession over the past year. “As we get closer to fall, these numbers are accelerating [inflation gauges] will refuse,” he said.

It also means the Fed doesn’t need to raise interest rates any further as the banking crisis will do the Fed’s work, Cox told MarketWatch in a phone interview on Friday.

“Therefore I don’t think the Fed needs to hike rates next week because the only thing they will achieve with next week’s rate hike is to further aggravate the banking crisis. The 25 basis point rate hike will have a small impact on inflation but a massive impact on a very fragile banking system,” said Cox.

Elsewhere, the Bank of Japan maintained ultra-low interest rates but also said it would begin a new policy review at the first meeting of new governor Kazuo Ueda. The Japanese yen fell 1.2% against the US dollar.

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— Barbara Kollmeyer contributed to this article

– Isabel Wang

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4/28/23 1500ET

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