The latest on inflation and markets

Stocks ended Wednesday mixed as investors digested the latest inflation data.

The April Consumer Price Index showed that inflation cooled last month, sending stocks higher earlier in the session. But trading wavered throughout the day as Wall Street continued to worry about the banking sector’s stability and the looming debt ceiling crisis.

Tech stocks gained: Alphabet shares rose about 4%, Advanced Micro Devices gained about 2%, ServiceNow ticked up 2.9% and Amazon added 3.3%.

Bank stocks fell. Shares of PacWest Bank slipped 0.5%, KeyCorp fell 4.1% and New York Community Bank slid by 1.1%. JPMorgan Chase shares fell roughly 0.1% and Wells Fargo declined 0.6%.

Shares of Airbnb fell 10.9%, marking its worst day since November 2022 after the company on Tuesday issued a cautious outlook for the current quarter and a miss on bookings.

West Texas Intermediate, the US benchmark for oil, ticked down about 1.2% to roughly $73 a barrel.

Investors are also looking to the April Producer Price Index as well as the latest jobless claims and mortgage rates data set for release Thursday.

Disney reports earnings after the close.

The Dow fell 31 points, or 0.09%.

The S&P 500 gained 0.5%.

The Nasdaq Composite ticked up about 1%.

As stocks settle after the trading day, levels might still change slightly.

The US Treasury building in Washington, DC, on March 13.

Florida, Ohio and Pennsylvania would likely lose hundreds of thousands of jobs apiece if there is a prolonged breach of the debt ceiling, according to projections released on Wednesday by Moody’s Analytics.

The analysis spells out the widespread damage that would be caused in the unlikely event of a protracted breach of the borrowing limit.

In that scenario, Moody’s estimates the unemployment rate would spike to near-double digits in the District of Columbia (8.9%), California (8.7%) and Ohio (9.5%). Michigan’s unemployment rate would peak at 10.8%, up from 4.1% today.

Moody’s found that most states would be “hit hard” by a debt limit breach, but the economic pain would vary from state to state. The most immediate impact would be for regions with a large federal government presence, including Washington DC and states located near or that rely on federal institutions such as national labs or military bases such as Alaska, Hawaii and New Mexico.

Other states that would feel significant impact are ones that rely on federal spending and aerospace such as Virginia, Connecticut, Kansas and Washington.

Moody’s said tourism-dependent states including Arizona, Florida and Nevada will eventually experience “sharp” job loss as well those that rely on auto manufacturing like Michigan and South Carolina.

In a prolonged breach of the debt ceiling, Moody’s estimates some large states would each lose hundreds of thousands of jobs:

California: 841,600

Texas: 561,700

Florida: 474,700

New York: 398,300

Ohio: 296,500

Pennsylvania: 269,000

Georgia: 249,400

As leaders in Washington fail to make progress on a debt ceiling deal, Moody’s Analytics warns there is a significant risk that lawmakers will fail to raise the $31.4 trillion borrowing limit in time.

In a report published on Wednesday, Moody’s assigns a 10% probability to a breach of the debt ceiling, up from 5% previously.

“What once seemed unimaginable now seems a real threat,” Moody’s Analytics chief economist Mark Zandi wrote in the report.

A breach is not the same thing as a default.

In an email to CNN, Zandi explained that a breach would occur if the Treasury Department fails to make a payment to any creditor on time – whether that be a Social Security recipient or the electric bill for a government building in Omaha.

A default would only occur if Treasury fails to make a debt payment on time, Zandi said.

In the report, Zandi wrote that if there is a breach, it would be “much more likely to be a short one than a prolonged one,” though even a “lengthy standoff no longer has a zero probability.”

The new warning from Moody’s comes a day after a meeting on Tuesday between President Joe Biden and Congressional leaders ended without any progress on a debt ceiling deal.

Zandi noted that although there are some emerging signs of concern in financial markets, for the most part investors “appear largely unruffled” by the looming June 1st deadline.

“The longer it takes for financial markets to react,” Zandi wrote, “the greater the odds that lawmakers will not act in time, since market turmoil is probability what it will take to generate the political will lawmakers will need to come to terms.” 

Grocery prices continued to fall last month, even as restaurant meals got more expensive, according to data released Wednesday by the Bureau of Labor Statistics.

From March to April, grocery prices ticked down 0.2%, with many major food groups marking sharper declines.

Dairy prices fell 0.7%, thanks to a 2% decline in milk prices, which was the biggest drop in that category since February 2015.

Together, fruit and vegetable prices fell 0.5%, and prices for meat, poultry, fish, and eggs dipped 0.3%.

Other food items, including cereal and bakery products, got a bit more expensive last month.

And menu prices increased by 0.4%, driven up by limited-service restaurants like fast casual and fast food joints. Those menu prices went up by 0.6%.

Food prices have been soaring due to a number of factors. Extreme weather, from droughts to flooding, has been hurting crops and reducing supply. The war in Ukraine has impacted grain and other prices. Avian flu has constricted egg supply. And all of these disruptions, plus others, have provided cover for food companies to raise prices even above what their rising costs would dictate.

In the year through April, some items got much more expensive. Flour, for example, went up 17.8%. Bread prices rose 12.6%. Eggs got 21.4% pricier, and margarine spiked 23.8%.

Others saw more moderate increases. Ham got 6.5% more expensive, poultry prices rose 5%, and fish and seafood rose 2%.

Some items got cheaper over the course of the year: Pork prices went down 2.2%, with bacon falling 8.9% and fresh fruit declining 1.8%.

Traders work on the floor of the New York Stock Exchange on May 3, in New York City.

Stocks were mixed Wednesday mid-morning after the April Consumer Price Index report signaled that prices are continuing to stabilize.

The S&P 500 gained about 0.2% and the Nasdaq Composite rose 0.7%. The Dow fell 101 points, or 0.3%.

The S&P 500’s communication services and information technology sectors gained — signaling investors’ increasing confidence that inflation is moderating and long-term rates will move lower. The utilities sector also outperformed the broader S&P index.

That’s a reflection that investors are “trying to eke out the last bit of juice from the utility side of things by jumping in at these yields,” said Peter Essele, head of portfolio management at Commonwealth Financial Network.

The 10-year Treasury yield fell to 3.46%, down from 3.52% on Tuesday.

Some of the top traders and executives in the country — associated with banks like Goldman Sachs and JPMorgan — are publicly warning of the “unthinkable” implications that a US debt default would have on the economy.

In a letter to Treasury Secretary Janet Yellen, current and former members of the Treasury Borrowing Advisory Committee wrote that they are “deeply concerned about the lack of resolution,” around the debt limit.

“Anything that damages investor confidence at a minimum elevates the cost of that financing, and at worst could jeopardize US borrowing access entirely,” they wrote.

“The magnitude of adverse consequences from a prolonged negotiation, or a default, is unquantifiable, with both the American taxpayer and the US economy bearing the burden,” the letter continued.

Yellen, in turn, has been calling on CEOs and other business leaders to discuss the consequences of brinkmanship around the debt ceiling, reports my CNN colleague Matt Egan.

And ater months of relative silence, business advocates are beginning to speak out against the budgetary impasse.

“With the US at risk of defaulting on its obligations as soon as June 1, meaningful, bipartisan discussions on raising the debt ceiling can no longer wait,” Josh Bolten, chief executive of the Business Roundtable, the largest business group in the country, wrote in a statement Tuesday.

“A default would deliver a severe blow to the economy, leading to widespread job losses, decimated retirement savings and higher borrowing costs for families, businesses and the government,” said Bolten.

Michael Hanson, chief lobbyist at the Retail Industry Leaders Association, also spoke out. Retailers have been pounded by supply chain woes and the pandemic, and don’t need any more economic headwinds, he said in a statement.

“What they crave more than anything is a period of relative calm and certainty after 3-plus years of managed chaos,” Hanson wrote. “A misstep over the debt ceiling would subject businesses and consumers to an economic shockwave.”

Others business leaders are adding their voices: Neil Bradley, executive vice president of the US Chamber of Commerce, said in a statement last week that “the full faith and credit of the United States government should never be placed at risk.”

Chairman of Icahn Enterprises Carl Icahn participates in a panel discussion at the New York Times 2015 DealBook Conference at the Whitney Museum of American Art on November 3, 2015 in New York City.

Icahn Enterprises, activist investor Carl Icahn’s firm, announced Wednesday that the US Attorney’s office is seeking information about the company’s finances.

Shares fell 17% on the news.

The company said the US Attorney’s office for the Southern District of New York reached out on May 3, a day after Hindenburg Research criticized Icahn Enterprises for overvaluing its holdings by 75% and orchestrating a “Ponzi-like” dividend payment scheme.

Icahn said in a statement that the short-seller’s report was self-serving and aimed at generating a quick profit at the expense of his company’s shareholders.

Shares of IEP plunged 20% on May 3, wiping billions of dollars off Icahn’s net worth. The stock has recovered somewhat but is still down double digits from where it sat on May 2.

The company noted the US Attorney hasn’t alleged any wrongdoing.

“We are cooperating with the request and are providing documents in response to the voluntary request for information,” the company said in a statement. “We believe that we maintain a strong compliance program.”

The Federal Reserve building is pictured in Washington, on March 19, 2019. 

Traders are holding strong to their bets that the Federal Reserve will pause interest rates soon following a cooldown in the April Consumer Price Index.

Markets are pricing in a roughly 86% probability that the Federal Reserve will pause rates at its next meeting, according to the CME FedWatch Tool.

Futures are also betting with 100% certainty that the Fed will cut rates beginning in September.

That comes after the latest CPI data showed inflation cooled for the 10th consecutive month. The CPI rose by 4.9% for the 12 months ended in April, showing a slightly slower pace of increase than the 5% in March but still below economists’ expectations for no change.

The White House in Washington, DC, on February 28

Whether one’s paycheck can keep pace with inflation is always a concern. But for women, the question is also can their pay keep pace with their male peers?

On Wednesday, the White House Office of Personnel Management proposed regulations to prohibit managers at federal agencies from considering a new hire’s salary history when setting their pay for a position.

While many factors create a gender pay gap, one that can perpetuate it is the use of salary history to establish a new hire’s pay, rather than making an offer strictly based on the competencies the person brings to the role.

Women — particularly minority women — who may have been regularly underpaid in the private sector relative to men can never escape that disadvantage if their salary history follows them to every new job.

The gender pay gap in the federal government is far lower than that of the private sector, according to OPM. That’s largely thanks to published rates of pay for every role’s grade-level. But managers at federal agencies have discretion to pay more than the published rates in select circumstances, primarily when there is a dire need to fill a role or to find someone with highly specialized skills.

“These proposed regulations are a historic step forward that will help make the federal government a national leader in pay equity,” said OPM Director Kiran Ahuja. “Relying on a candidate’s previous salary history can disproportionally hurt women and minorities. With these proposed regulations, the federal government is leading the way and demonstrating to the nation that we mean business when it comes to equality, fairness, and attracting the best talent.”

To date, only 21 states either prohibit or otherwise limit the extent to which employers may take job applicants’ salary history into consideration.

For nearly two years, Fed officials have said, repeatedly, that the central bank is committed to stabilizing prices at around 2%. But what’s so special about 2%? Why has the Fed been so focused on hitting that target? 

The answer is surprisingly arbitrary. 

Three decades ago, inflation targeting wasn’t really a thing. But a bunch of policy wonks over in New Zealand were trying to figure out how to bring double-digit inflation under control. One day, the finance minister went on TV and just told everyone there was a new target. 

“It was a bit of a shock to everyone, I think,” Roger Douglas, the Labour Party finance minister, told Reuters’ Lucy Craymer earlier this year. “I just announced it was gonna be 2%, and it sort of stuck.” 

The 2% target became all the rage among central banks.

Economists and policy makers began to see it as the sweet spot for inflation — a positive but low level that signals an economy is growing, but not so fast that it’s straining consumers. It became engrained in US economic policy by the mid-90s, though it wasn’t formally announced as a target for the Fed until 2012, under Chairman Ben Bernanke.

Of course, econ wonks have continued to argue about it.

“Two percent is kind of a compromise,” said Josh Bivens, research director and chief economist at the Economic Policy Institute. “It’s for the people who thought there should be some positive but low inflation. And then for the people who want pure price stability, or 0% inflation — 2% is almost a measurement error.”

Arbitrary, yes. But effective. And the result of low inflation over the long term has been that most people don’t really think about it.

But after decades of barely perceptible inflation, US prices spiked, peaking above 9% year-over-year in June last year. That’s renewed some debate about the merits of the 2% target and whether it’s time to move the goal posts — something Fed officials aren’t considering at this time. 

On Tuesday, New York Fed President John Williams was asked about the inflation target at an event. 

“The 2%, target I don’t view as arbitrary … One of the things we realize from both experience in the US and around the world is that high and variable inflation undermines the ability to achieve maximum employment and the economy’s potential over time. Countries that have high variable inflation do worse in terms of economic performance.”