Wall Street traders looked past mixed economic data, sending stocks and bonds higher before an inflation reading that will help define the Federal Reserve’s next steps.

The S&P 500 hit another all-time high — despite losses in its most-influential group: technology. A drop in retail sales helped soothe investors’ nerves about overheated consumer demand — especially after all the jitters caused by a strong inflation print earlier this week. Bond yields fell, with Fed swaps fully pricing an interest-rate cut in June.

For months, investors have been dealing with clashing economic narratives. Progress toward lower inflation has shaped the view that the Fed can cut interest rates from multiyear highs to avoid pushing the U.S. into a recession. At the same time, the economy has outperformed expectations, giving the central bank cover to delay.

“The data is complicated — a true dichotomy,” said Gina Bolvin president of Bolvin Wealth Management Group. “The market will be volatile as it digests the data and scrutinizes every data point.”

The S&P 500 rose to around 5,030, led by gains in banks and energy companies. Tesla Inc. climbed over 6 per cent. Nvidia Corp. dropped from a record, while Alphabet Inc. sank on a report that ChatGPT owner OpenAI is developing a web search product that would compete with Google. Treasury 10-year yields retreated two basis points to 4.24 per cent.

Both retail sales and factory production pointed to a loss of momentum — though not necessarily signaled significant deterioration in the economy. In fact, the data also showed sentiment among homebuilders hit a six-month high and jobless claims declined.

A hotter-than-expected consumer price index earlier this week roiled financial markets, with traders resetting their bets on Fed rate-cuts in 2024.

Next up will be the producer price index — which wouldn’t normally get as much attention from markets as the CPI — but will be highly scrutinized this time around.

“Tomorrow’s PPI will be closely watched by markets and should drive the near-term direction for the equity and bond markets,” said Larry Tentarelli, chief technical strategist at Blue Chip Daily Trend Report.

Signs that inflation anxiety remains potent included strong demand for Treasury options strategies targeting 10-year yields to exceed 4.4 per cent in the coming weeks, a level last seen in November.

“Today’s weak retail sales and middle-of-the-road jobless claims total may help soothe the market’s nerves in the near term,” said Chris Larkin at E*Trade from Morgan Stanley. “But there may still be an element of ‘altitude sickness’ at work, since the higher the market rallies, the more vulnerable it may be to setbacks when individual economic numbers don’t fit the rate-cutting narrative.”

Fed Chairman Jerome Powell will testify before key House and Senate committees next month. 

The amount of money that investors are parking at a major Fed facility dropped below US$500 billion for the first time since 2021.

Market participants have been closely watching the pace at which the so-called RRP drains: Some on Wall Street warn that the draining facility is evidence that excess liquidity has been removed from the financial system — that bank reserve balances aren’t as abundant as policymakers believe.

Money-market fund assets dropped for the first time in three weeks, led by a departure of cash from institutional government funds.  

About $4.29 billion flowed out of U.S. money-market funds in the week through Feb. 14, according to Investment Company Institute data. Total assets dropped to $6.014 trillion from $6.018 trillion the week prior. 

Corporate Highlights:

• Apple Inc., racing to add more artificial intelligence capabilities, is nearing the completion of a critical new software tool for app developers that would step up competition with Microsoft Corp.
• Microsoft Corp. will make four exclusive Xbox games available for Nintendo Co.’s Switch and Sony Group Corp.’s PlayStation, sharing homegrown titles with rivals in the first significant way as the company looks to boost revenue in a stagnant gaming market.
• The Justice Department plans to scrutinize the new streaming service proposed by Walt Disney Co., Fox Corp. and Warner Bros. Discovery Inc. over concerns it could harm consumers, media rivals and sports leagues.
• Digital World Acquisition Corp., the blank-check firm that’s been looking to take Donald Trump’s media company public, soared after receiving a long-awaited nod from the U.S. Securities and Exchange Commission.
• Nvidia Corp., the chipmaker at the heart of an artificial intelligence spending boom, disclosed investments in Arm Holdings Plc, SoundHound AI Inc. and the biotech company Recursion Pharmaceuticals Inc.

Key Events This Week:

• U.S. housing starts, PPI, University of Michigan consumer sentiment, Friday
• San Francisco Fed President Mary Daly speaks, Friday
• Fed Vice Chair for Supervision Michael Barr speaks, Friday
• ECB executive board member Isabel Schnabel speaks, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.6 per cent as of 4 p.m. New York time
• The Nasdaq 100 rose 0.2 per cent
• The Dow Jones Industrial Average rose 0.9 per cent
• The MSCI World index rose 0.8 per cent

Currencies

• The Bloomberg Dollar Spot Index fell 0.4 per cent
• The euro rose 0.4 per cent to $1.0771
• The British pound rose 0.2 per cent to $1.2596
• The Japanese yen rose 0.4 per cent to 149.96 per dollar

Cryptocurrencies

• Bitcoin fell 0.1 per cent to $51,701.41
• Ether rose 1.7 per cent to $2,826.92

Bonds

• The yield on 10-year Treasuries declined two basis points to 4.24 per cent
• Germany’s 10-year yield advanced two basis points to 2.36 per cent
• Britain’s 10-year yield advanced one basis point to 4.05 per cent

Commodities

• West Texas Intermediate crude rose 2 per cent to $78.17 a barrel
• Spot gold rose 0.6 per cent to $2,004.17 an ounce