NEW YORK -- The stock market shook off a shaky start and headed higher Thursday after a tame inflation reading and another weak jobs report raised expectations that the Federal Reserve is closer to offering more support for the U.S. economy.
Applications for unemployment benefits rose last week. The four-week average increased for a third straight week, another sign that the jobs market remains weak.
However, many economists believe that employers hired people earlier than they typically would this year because of the warm winter. If so, the U.S. is simply in a lull and hiring will accelerate in coming months.
Unemployment benefit applications measure the pace of layoffs and for economists to see that late hiring trend play out, they will be looking for weekly claims lower than 375,000 over several weeks.
If there is a plus for consumers, it's falling prices.
The government also reported that the main measure of U.S. consumer prices fell in May by 0.3%, the biggest drop since December 2008. Analysts said the slowdown in price increases could make it more likely that the Fed will announce new steps to boost the economy when it meets next week. Low inflation gives the Fed more leeway to inject money into the financial system, keep interest rates low and encourage borrowing.
Over the past 12 months ending in May, consumer prices rose 1.7%, much less than the pace for the 12 months that ended in April. Core prices have risen 2.3% in the past year, the same as for the 12 months ending in March and April. That's comfortably close to the Federal Reserve's 2% target for inflation.
Whether prices are subdued enough to keep consumers active is far from certain.
Average hourly earnings for workers have risen just 1.7% in the past 12 months, less than the pace of inflation over that same period.
That balance is critical for any U.S. recovery, with consumers powering 70% of the economy.
The Dow Jones industrial average, the Standard & Poor's 500 index and the Nasdaq composite index were all higher in afternoon trading.
"The markets are higher, I think, because there are enough investors who believe that this morning's data on prices and jobless claims increase the case for more Fed easing as soon as next week's meeting," said Clark Yingst, chief market analyst at the securities and banking firm Joseph Gunnar.
Just the whiff of another round of help from the Fed has been enough to shoot stocks higher in recent weeks, but the gains often disappear as quickly as they arrive. Last Wednesday, the Dow posted its best day this year, surging 286 points. Comments from a Fed official that hinted at more stimulus helped launch the rally.
The rally fizzled the next day, however, after Fed Chairman Ben Bernanke told a closely watched Congressional hearing that no new steps were being contemplated at the moment.
The question of will or won't the Fed act again is top of mind for investors. The Fed's latest round of bond purchases is scheduled to wind down at the end of this month, and market players are wondering whether a third is on the way, or if the current program might be extended. By making trillions of dollars' worth of bond purchases, the Fed helps keep interest rates ultra-low and encourages investors to put money into other assets, like stocks.
"Ultimately, all that matters for investors right now is whether these developments mean the Federal Reserve is more or less likely to ease policy in order to support what they may see as an insufficiently strong economic recovery," said Dan Greenhaus, chief global strategist at the brokerage BTIG, in a note to clients.
In Europe, borrowing rates for Spain touched a record high Thursday after the rating agency Moody's cut its credit rating to one notch above junk status. Spain's benchmark 10-year bond hit 6.96% before pulling back. That is the level of borrowing that floored Greece, Ireland and Portugal, all three of which were forced to seek massive bailouts.
Meanwhile, Greece will hold national elections Sunday that could determine if the financially crippled nation exits the euro. The election heralds a close race between the conservative New Democracy party, which has supported the nation's bailout, and the radical left Syriza party, which wants to scrap Greece's austerity commitments and potentially leave the eurozone.
USA Today