What happened

PayPal Holdings (PYPL -2.07%) was bouncing around on Tuesday, up 5.4% in morning trading, but then dropping as the day went on. By 2:20 p.m. ET, the share price was down 0.3% to $73.58.

The major indexes were up slightly on Tuesday, with the Nasdaq Composite up 90 points, or 0.8%, the Dow Jones Industrial Average up just 60 points, or 0.2%, and the S&P 500 up 24 points, or 0.6%, as of 2:20 p.m. ET.

So what

There were a few factors that caused PayPal to move on the day, starting with the November Consumer Price Index, which saw the inflation rate at 7.1% year over year. That was down from 7.7% in October. It was also lower than economists expected, as the consensus was for inflation to come in at 7.3% in November.

The market jumped higher on the news, which was released before the opening bell. It signals that inflation may have peaked, and also raises expectations that the Federal Reserve Board will begin to slow the pace of interest rate hikes after four straight 75-basis-point hikes. The board meets this week and will announce any changes to interest rates Wednesday afternoon.

For PayPal, which relies on consumer spending, the initial jolt likely stemmed from the fact that lower inflation, and by extension, lower rate hikes, is a positive sign for consumer spending.

Now what

While the good news on inflation, and potentially interest rates on Wednesday, may jolt the market this week, there is a lot of economic uncertainty heading into 2023. Interest rates will likely continue to rise as inflation is still high, and economists raise the likelihood of a recession or economic slowdown and a market correction. These macroeconomic factors will continue to provide some headwinds for PayPal in the near term.

Also on Tuesday, Kevin Barker, an analyst with Piper Sandler, initiated coverage on PayPal with a neutral rating and a price target of $85. That would be about a 15% increase over the current price. This is a lower target than from most analysts, who largely consider it the equivalent of overweight, or a "buy."

Barker said in a research note that PayPal was going through a period of transition where it shifts from "pushing for growth to harvesting what it has built." He expects PayPal to remain range-bound until it shows it can consistently grow earnings with limited customer growth.

This may have dampened the enthusiasm for some investors, as the stock price dropped after the initial surge.