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U.S. stocks end mixed as investors cheer inflation data, Alphabet

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Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., May 4, 2023. REUTERS/Brendan McDermid

The S&P 500 and Nasdaq indexes rose on Wednesday, helped by a slightly lower-than-expected increase in April inflation and Alphabet Inc’s (GOOGL.O) latest artificial intelligence rollout.

The Labor Department’s Consumer Price Index (CPI) rose 4.9% in April from a year ago, compared with expectations of a 5% increase, raising hopes that the Federal Reserve’s interest rate hiking cycle is close to an end. Month-over-month CPI in April rose 0.4% after gaining 0.1% in March.

“Markets reacted positively because they saw the inflation data as a small positive,” said Michael Harris, president at hedge fund Quest Partners LLC. “The Fed is in a pause now. They’ve done their last rate hike and they’re going to wait and see for the next couple of months.”

The lower-than-expected inflation data drove the Nasdaq Composite Index (.IXIC) up as much as 1.17% to its highest intraday level in more than eight months.

The Nasdaq was helped by a climb in Alphabet(GOOGL.O) as the company rolled out more artificial intelligence for its core search product in response to competition from Microsoft Corp (MSFT.O).

Large-cap tech stocks including Apple Inc (AAPL.O) and Microsoft also gained.

The rate-sensitive S&P 500 technology sector index (.SPLRCT) and the communication services (.SPLRCL) rose.

“The CPI is indicating some sort of relief in inflationary pressure. That would mean the Fed would be toward the end or already at the end of its interest rate cycle, and growth companies are most heavily affected by higher interest rates,” said Kevin W. Philip, a partner at investment advisor Bel Air.

Growth companies rely more on borrowed money so they benefit from lower rates.

Fed funds futures traders are pricing in a pause in rate increases at the central bank’s June meeting, and less than a 5% chance of another 25 basis point hike.

“The market is pricing in a Fed cut beginning this summer. While inflation is decelerating, it’s not decelerating at a pace that would justify cutting the Fed funds rate anytime before the fourth quarter of 2023,” said Matthew Palazzolo, senior investment strategist at Bernstein Private Wealth Management.

Indexes were choppy during the session, as investors digested the positive inflation print with concerns about the looming debt ceiling.

Talks on raising the U.S. federal government’s $31.4 trillion debt ceiling entered a new phase on Wednesday as some areas of potential compromise emerged after Tuesday’s White House meeting.

According to preliminary data, the S&P 500 (.SPX) gained 17.93 points, or 0.44%, to end at 4,137.10 points, while the Nasdaq Composite (.IXIC) gained 124.68 points, or 1.04%, to 12,304.23. The Dow Jones Industrial Average (.DJI) fell 33.45 points, or 0.10%, to 33,528.36.

Regional bank shares extended declines from volatile sessions last week on concerns about the sector’s health. PacWest Bancorp (PACW.O) and Zions Bancorporation (ZION.O) inched lower.

Oil and gas producer Occidental Petroleum Corp (OXY.N) fell after its first-quarter earnings fell short of analysts’ estimates.

Livent Corp (LTHM.N) rose after Australian lithium miner Allkem Ltd (AKE.AX) agreed to merge with the U.S.-based chemical manufacturing firm to create a $10.6 billion firm.

Airbnb Inc (ABNB.O) lost as the vacation rental booking company had fewer bookings and lower average daily rates in the second quarter.

Rivian Automotive (RIVN.O) jumped after the electrical vehicle maker beat estimates for its first-quarter results and reiterated its annual production forecast.

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