July 13, 2023

Global shares achieved unprecedented record levels on Thursday, driven by a surge in investor optimism sparked by the possibility of the Federal Reserve halting its interest rate hikes. The S&P 500 reached a new peak in 2023, the Dow Jones Industrial Average traded 86.1 points higher, and the NASDAQ experienced a 1.15% increase, reaching its highest point since April 2022.

With Wall Street expected to open positively, U.S. stock index futures indicated a strong start for the main indexes following remarkable gains on Wednesday. This rally was triggered by recent data revealing a modest rise in consumer prices during June. The current U.S. inflation rate stands at 2.97%, compared to 4.05% last month and 9.06% last year, remaining below the long-term average of 3.28%.

Market participants, closely monitoring inflation levels for signals regarding future monetary policy decisions, found reassurance in the recent figures. The encouraging data has raised hopes that the Federal Reserve will exercise caution and consider pausing its current trajectory of interest rate hikes. Since March 2022, the Fed has raised interest rates by 5 percentage points to combat the highest U.S. inflation in four decades. The possibility of a pause in interest rate hikes has revitalized investor confidence.

Understanding the complex relationship between inflation, the stock market, and interest rates is crucial. When the Fed increases interest rates, it leads to higher borrowing costs for banks, which are then passed on to consumers and businesses. Consequently, consumers reduce their borrowing, leading to increased savings and decreased spending and investment, ultimately lowering demand and putting downward pressure on prices, thereby reducing inflation.

How does this affect the stock market? When interest rates are high, fixed income securities like bonds become more appealing than stocks. Additionally, borrowing becomes more expensive for companies, potentially decreasing profitability and lowering stock valuations. Overall, higher interest rates result in reduced economic activity, impacting companies’ profitability and contributing to a decline in stock prices.

The surge in global shares reflects the market’s positive sentiment and the belief that a potential pause in interest rate hikes will sustain economic growth and bolster corporate earnings. This optimism has driven gains across various sectors, including technology, finance, and manufacturing.

While the stock market continues to ride the wave of positive news, attention now turns to the upcoming Federal Reserve meeting scheduled later this month. Market watchers will closely analyze the central bank’s decision and statement for any indications regarding their stance on monetary policy and future interest rate adjustments.

Economists and analysts maintain a cautiously optimistic outlook, suggesting that a pause in interest rate hikes could provide stability and further support the ongoing global economic recovery. However, they acknowledge that uncertainties, such as potential inflationary pressures and geopolitical tensions, pose ongoing challenges to the market outlook.

photo source Google

Delino Gayweh

Serrari Financial Analyst