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Wall Street gains ground, turning higher for the week

U.S. Inflation slightly cooling down
U.S. inflation slightly slowing down, November Consumer Price Index report shows 06:06

Stocks rose on Wall Street Wednesday, lifting major indexes into the green for the week as investors were cheered by signs that consumers remain resilient as well as strong corporate earnings reports.

The S&P 500 rose 1.5%, while the Dow Jones Industrial Average rose 1.6%. The tech-heavy Nasdaq rose 1.5%.

Consumer confidence remains surprisingly strong, despite inflation squeezing household budgets. The Conference Board reported Wednesday that its consumer confidence index rose to 108.3 in December, up from 101.4 in November. It's a sharp rebound, pushing the index to its highest level since April. 

"The news has delivered a kind of a sweet spot for the Federal Reserve," said Megan Horneman, chief investment officer at Verdence Capital Management. "The consumer is staying relatively resilient."

At the same time, investors were also cheered by some strong corporate earnings reports. Nike surged 12% after reporting results that trounced analysts' estimates. FedEx rose 3.5% after reporting strong earnings. Energy stocks gained ground as U.S. crude oil prices settled 2.9% higher. Hess gained 3.1%

Treasury yields mostly fell. The yield on the 10-year Treasury, which influences mortgage rates, slipped to 3.67% from 3.69 late Tuesday.

Inflation fight

Despite consumer optimism, investors continue to grapple with expectations that interest rates will remain high for longer than they had thought, as the Federal Reserve continues fighting stubbornly hot inflation. The federal funds rate stands at a range of 4.25% to 4.5%, the highest level in 15 years. Fed policymakers forecast that the central bank's rate will reach a range of 5% to 5.25% by the end of 2023. Their forecast doesn't call for a rate cut before 2024.

Wall Street is worried that central banks will go too far in raising interest rates and ultimately slow the economy so much that it slips into a recession. That has left investors closely focused on economic updates to get a better idea of how businesses and consumers are dealing with inflation.

"This is likely to be the broader economy's trend in 2023: Some relief from the inflation that dogged the US since the pandemic, while economic activity softens further in response to high interest rates," noted Bill Adams, chief economist for Comerica Bank, in an email.

Sales of previously occupied homes fell more than economists expected in November. The housing market has been a strong area of the economy, but has been tempered by rising mortgage rates. That has made an already tight housing market even more difficult for prospective homebuyers.

Consumer spending, along with the employment market, has been another strong area of the economy that has helped protect it from slipping into a recession. Wall Street has been hoping that the Fed can win its fight against inflation while keeping the economy expanding, what economists call a "soft landing." The latest consumer confidence report raises hopes for that outcome in 2023, Horneman said.

The government will release a closely watched monthly snapshot of consumer spending on Friday, the personal consumption expenditure price index for November. The report is monitored by the Fed as a barometer of inflation, which has been easing, but at a relatively slow pace. Economists expect the report to show that inflation continued cooling in November.

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