Dow down nearly 200 points, S&P 500, Nasdaq waver on soft ISM manufacturing data, key inflation measure

How stock indexes are trading

• The Dow Jones Industrial Average
  DJIA,
  +0.48%
  fell 190 points, or 0.6%, to 34,398.

• The S&P 500
  SPX,
  -0.23%
  was nearly flat, at 4,079.

• The Nasdaq Composite
  COMP,
  +4.18%
  gained 22 points, or 0.2%, to 11,490.

On Wednesday, the Dow rose 737 points, or 2.2%, the S&P 500 jumped 3.1%, and the Nasdaq Composite advanced 4.4%. The Dow rose 20.4% during October and November, the biggest two-month percentage gain since July 1938, according to Dow Jones Market Data.

What’s driving markets

The Institute for Supply Management’s manufacturing index, a key barometer of activity at American factories, fell to 49% in November. A reading of less than 50% indicates a contraction. The index was at 50.2% in October.

The ISM report is viewed as a window into the health of the manufacturing economy.

Stocks turned down on profit-taking after Wednesday’s big jump, said Michael Hewson, chief market analyst at CMC Markets, in a note, while the ISM data underlined expectations the Fed has room to slow down the pace of rate increases.

“This peak inflation, softer growth narrative was reinforced by the ISM manufacturing survey which fell into contraction territory for the first time since May 2020, while prices paid fell to 43, and employment also contracted at 48.4,” he wrote.

Earlier, a gauge of U.S. inflation, the personal-consumption expenditures index, rose a modest 0.3% in October, adding another piece of evidence that points to slowly easing price pressures. The yearly rate of inflation slowed to 6% in October from 6.2% in the prior month and a 40-year high of 7% last summer. Moreover, core PCE rose 0.2%, instead of the 0.3% expected by economists

“We’re watching the inflation data closely and the most important inflation report of the year is going to be the CPI report on 12/13, which could confirm the downtrend in inflation, which was first observed on 11/10 (and which ignited a 5.5% single-day gain in the S&P 500),” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.

“On the other hand, if inflation surprises to the upside on 12/13, then all bets are off and we could see a sell-off into year-end – especially if the Fed decides to raise by 75 bps the next day, instead of the 50 bps which everyone is counting on.”

See: Global financial markets having ‘awful year’ despite ‘great’ November for most assets, says Deutsche Bank

Stocks jumped Wednesday when Federal Reserve chairman Jerome Powell made a speech that was less hawkish than expected.

The S&P 500 index surged 3.1% on Wednesday following the Fed chairman’s confirmation that a lower pace of interest rate hikes to combat inflation was more likely in coming months. It took the U.S. stock benchmark’s gains since its 2022 low in mid-October to 14.1%, after recent signs of easing price pressures had encouraged risk appetite once more.

“The general upbeat feeling since last month’s soft CPI print has carried into December after stocks surged thanks to a speech from Fed Chair Powell,” said Stephen Innes, managing partner at SPI Asset Management. “With markets increasingly predisposed to a terminal rate below 5% and inflation getting back close to target in 2024, the stock market’s rally could extend as pivot hopes should increase with interest rate risk now disproportionately skewed to the downside.”

“With so much money on the sidelines, fund managers may need to move into catch-up mode, so I suspect the market makers will position to get ahead of this flow in the new year so that the stock market dips will be shallow,” Innes added.

However, investors will be aware that the Fed’s policy trajectory remains dependent on data showing inflation continuing to slow as the economy cools. To that end traders will be keenly eyeing a batch of data over the next two sessions.

Two-year Treasury yields
TMUBMUSD02Y,
4.268%,
which are particularly sensitive to monetary policy trends, continued to edge lower after the inflation data. The dip in yields has taken the shine off the dollar index
DXY,
-1.08%,
off 0.3% to, its lowest since August.

Meanwhile, more Chinese cities eased antivirus restrictions and police patrolled their streets Thursday as the government tried to defuse public anger over some of the world’s most stringent COVID measures and head off more protests.

Companies in focus

• Salesforce Inc.
  CRM,
  -9.77%
  announced late Wednesday that co-CEO Bret Taylor would be stepping down Jan. 31, leaving Chairman Marc Benioff as the sole CEO and also reported better than expected quarterly profit and revenue but projected fourth-quarter sales $900 million lower than Street expectations. Shares were down 9.7%.

• Dollar General
  DG,
  -8.41%
  shares fell 8.5% after the retailer missed third-quarter earnings estimates and said it would fall short of fourth-quarter targets on higher costs.

• Kroger
  KR,
  -0.30%
  shares were off 0.3% amid the broad selloff, after the supermarket chain posted better-than-expected third-quarter earnings and raised its full-year guidance.

• Costco
  COST,
  -6.14%
  slumped 6.1% after the retailer said its November sales rose 5.7% to $19.17 billion, following a 7.7% rise in October. 

•  AMC Entertainment Holdings Inc.
  AMC,
  +19.23%
  shares rallied over 15% with the stock being halted for volatility in midday trading. The company announced its plan to lay off about 20% of its U.S. workforce on Tuesday as CEO Christina Spade departs the company after less than three months on the job.

• Other meme stocks also rallied with the home goods retailer Bed Bath & Beyond Inc. 
  BBBY,
  +6.03%
  climbing 7.5% and the videogame retailer GameStop Corp. 
  GME,
  +1.47%
  gaining 1.7%.

— Jamie Chisholm contributed to this article.