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Friday rally manages to keep some glasses half full on Wall Street

U.S. financial markets clinched a positive rally to cap off another losing week, portending what analysts hope is an end date to the sell-off and to inflation.

MANHATTAN (CN) — Rising inflation persists and markets continue to plummet, but experts remain holding their breath that the trends are nearly over.

After suffering four days of losses, Wall Street on Friday was poised for a comeback. The Dow Jones Industrial Average gained more than 500 points at one point, settling up 465 points for the day. The S&P 500 and Nasdaq finished the day’s trading with increases of 93 points and 434 points, respectively.

Ultimately, however, the day’s gains were not enough to offset the week’s overall losses. From last week’s closing bell to today’s closing bell, the Dow has declined 704 points, with the S&P 500 and Nasdaq shedding 100 points and 339 points, respectively.

Wall Street has now had six straight down weeks, and since the beginning of the year all three indices are down thousands of points. Since January 3, the first day of trading in 2022, the Nasdaq has shed about 3,839 points — more than one-fourth of its value as of January 3. The Dow and S&P 500 are down 4,100 points and 743 points since 2022 began.

The main bugaboo for Wall Street, as with Americans in general, is the same as it has been in recent weeks: inflation. On Wednesday, investors were hoping for some light at the end of the tunnel when the U.S. Bureau of Labor Statistics released its monthly data.

In April inflation prices still increased, though less than in previous months. Year-over-year inflation meanwhile still is incredibly high. The Consumer Price Index gained 0.3% in April after rising 1.2% the prior month, with prices up 8.3% since last year during the same period.

Just as problematic was the 0.6% increase in core prices, which reflect non-food and non-energy products that are often less volatile. As of the end of April 2021, core prices are up 6.2% after monthly gains of roughly half a percentage point since then. On the plus side, gasoline prices dropped 6.1% after the 18.3% price increase in March, while used vehicles and clothing prices also dropped somewhat.

Many analysts noted the overall massive inflation but tried to pick the peanuts out of the pile, predicting that inflation now has peaked. “The falls in headline and core inflation in April marks the beginning of a sustained decline, as base effects improve and supply shortages ease, although the 0.6% monthly jump in core prices indicates that underlying inflation pressures could be stronger than we had expected,” Andrew Hunter, senior U.S. economist at Capital Economics, wrote in an investor’s note.

The data threw cold water on hopes of the report buoying Wall Street, as on Wednesday, after the report was released, the S&P 500 still closed down about 70 points.

“This eliminates the positive (lower) surprise and takes away a potential catalyst for a market rally,” wrote Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance. “The inconvenient truth is the Fed is going to need to raise rates more quickly and to a higher level than many were hoping.”

Analysts predict the Fed — which already has raised interest rates on the federal funds rate twice to 0.75% to 1% — is likely to raise rates several more times this year by 0.5% each time. Congress seems to be fine with the Fed’s current path, as Chair Jerome Powell was confirmed 80-19 by the U.S. Senate on Thursday for a second term. Powell, considered a moderate, as nominated in 2017 by former President Donald Trump.

Another report from April showed producer prices are 11% higher than they were last year. Core producer prices gained 0.6% last month, following the 0.9% increase in March. While it is too soon to tell, especially since producer prices also fell in February to 0.2% from 0.8% in January, experts hope it means inflation has peaked and will now begin to decrease.

“Consumer demand for goods is cooling as spending shifts back to services and away from goods, and as higher food and energy prices eat into discretionary spending power,” said Bill Adams, chief economist at Comerica Bank, noting that “inflation is likely past the peak in the United States.”

Analyst hopes that inflation will be over soon have not yet trickled over to other sectors of the economy. Small businesses also are still relatively pessimistic about the economic outlook, as National Federation of Independent Businesses’ optimism index this week hit its fourth consecutive month below the 48-year average of 98, coming in at 93.2.

One-third of respondents in the index reported inflation as the single-most important problem facing their business, the highest reading on the index since 1980. Additionally, nearly half the respondents also reported they had job openings that could not be filled, and 93% of small-business owners said they had “few or no qualified applicants” for their open positions.

“Small business owners are struggling to deal with inflation pressures,” NFIB Chief Economist Bill Dunkelberg said in a statement. “The labor supply is not responding strongly to small businesses’ high wage offers and the impact of inflation has significantly disrupted business operations.”

Consumers also in the dumps, as the preliminary University of Michigan consumer confidence index fell from 65.2 in March to 59.1, well below analyst estimates and its weakest reading since August 2011. The index is now just a few points away from the 2008 low point of 55.3, and the survey noted that respondents mentioned inflation during various questions about personal financial situations, economic outlook and buying conditions.

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