US stocks end higher, erasing weekly loss for the S&P 500

The benchmark index rose 0.5%, and is on track for its third straight weekly gain. Bond yields initially rose, then mostly fell after a much-anticipated report showing a big jump in inflation last month.

The Labour Department said consumer prices jumped 5% in May, the biggest year-over-year increase since 2008. The figure was higher than the 4.6% rise that economists had expected.

While investors have been concerned about inflation for weeks, the May report seemed to reinforce the growing consensus that any increase in inflation will be temporary. A significant portion of the rise in consumer prices was tied to the sale of used cars, for example, which is largely attributed to the fact that many rental car companies are buying vehicles to beef up their fleets as people return to traveling.

“Keep in mind that as we start to make our way back to a full economic recovery, there is pent up demand and supply constraints from raw material and labor shortages,” said Mike Loewengart, a managing director at E-Trade Financial. “This creates the type of inflation that the Fed believes is transitory, meaning it too shall pass. Whether or not they are correct remains to be seen.”

The S&P 500 gained 19.63 points to 4,239.18, just beating the index’s previous all-time high set on May 7th. The Dow Jones Industrial Average edged up 19.10 points, or 0.1%, to 34,466.24. The Nasdaq Composite rose 108.58 points, or 0.8%, to 14,020.33.

Smaller company stocks lagged the broader market. The Russell 2000 index fell 15.72 points, or 0.7%, to 2,311.41.

Bond yields initially rose after the inflation data, then fell broadly by late afternoon. The yield on the 10-year Treasury note slipped to 1.45% from 1.49% late Wednesday.

Organon jumped 6.6% for the biggest gain in the S&P 500 and Pfizer rose 2.2% as health care stocks led the market higher. Technology and communication stocks also rose. Microsoft gained 1.4% and Activision Blizzard added 1.2%. Banks, industrial and materials companies were among the decliners. JPMorgan slid 1.6%, while Caterpillar dropped 3.8%. Vulcan Materials fell 3.1%.

Investors also reacted positively to more data that showed continued improvement in the labor market. The number of Americans who filed for unemployment benefits last week fell by 9,000 to 376,000, another pandemic low.

Stocks have been meandering all week as investors looked ahead to another inflation snapshot. The worry is that if signs of inflation are more than transitory, as the Federal Reserve has suggested, it could prompt central banks to withdraw stimulus from the economy to combat rising prices.

“The inflation outlook has rightfully been top of mind since last month’s blowout report,” Ryan Detrick, market strategist at LPL Financial wrote in a research note. “Under the hood, though, we think the picture is a bit more

than the headlines would suggest, and still believe inflation will be relatively well-contained over the intermediate-to-long term.”

Investors will get to see next week how the Fed is reading the latest inflation barometer and what monetary policy changes, if any, the central bank may consider. The Fed’s policymaking committee is due to deliver its latest economic and interest rate policy update next Wednesday.

Markets will also be tuning in this weekend for any developments at the summit of the Group of Seven in Britain. At the top of the leaders’ agenda is helping countries recover from the coronavirus pandemic, which has killed more than 3.7 million people and wrecked economies.

The G-7 leaders are meeting for three days at a British seaside resort. It’s the first such gathering since before the pandemic.