Stocks rally ahead of anticipated inflation report

Wall Street rose Monday as traders made their final moves ahead of a report that could show whether inflation is cooling in the right way or setting the market up for worse pain.

The S&P 500 climbed 1.1% in anticipation of Tuesday's report on inflation at the consumer level across the country. The Dow Jones Industrial Average gained 376.66 points, or 1.1%, while the Nasdaq composite rose 1.5%.

Stocks were coming off their worst week in nearly two months, the latest stumble for a market that has struggled for more than a year on worries about high inflation and the Federal Reserve's response to it. The Fed has aggressively hiked rates to their highest level since 2007 to drive down the worst inflation in generations. High rates can stamp out inflation, but they do so at the risk of sending the economy into a sharp recession and dragging on investment prices.

Economists expect Tuesday's report to show inflation slowed to 6.2% in January. That would be down from 6.5% a month before and from a peak of more than 9% in the summer. Perhaps more important than the overall number is what the data show specifically about prices for services outside of housing, such as haircuts or airfares. Inflation has remained stubbornly high there, when it's started to come down in other areas.

Worse-than-expected trends on inflation would raise worries that the Federal Reserve will stay firmer on rates than expected, which could mean more pain for Wall Street. Cooler-than-expected figures, meanwhile, could fan anew hopes that were rising earlier this year for the Fed to take it easier on rates.

Everyone agrees that inflation is heading in the right direction. The question is how quickly and steadily it will come down to the Fed's target of 2%, and what that means for when the Fed will pause its hikes to rates and eventually begin cutting them.

Treasury yields jumped last week after investors pulled their forecasts for rates closer to the Fed's. The central bank has been consistently saying it plans to keep rates higher for longer to ensure the job is done on inflation.

Yields were mixed Monday ahead of the inflation report. The yield on the 10-year Treasury, which helps set rates for mortgages and other important loans, dipped to 3.70% from 3.75% late Friday. The two-year yield, which tends to move more on expectations for the Fed, was at 4.54% and close to its highest since November.

All the worries about inflation and rates are happening against the backdrop of a decidedly lackluster earnings reporting season. Companies in the S&P 500 are on track to report a nearly 5% drop in earnings for the final three months of 2022, compared with a year earlier, according to FactSet.

By the count of strategists at Credit Suisse, this is shaping up to be the worst earnings reporting season outside of a recession in 24 years.