New York/London – U.S. stocks continued their upward momentum on Thursday, fueled by further indications of easing inflationary pressures in the country. The S&P 500 index reached a 15-month high, rising 0.8%, while the tech-heavy Nasdaq Composite surged 1.6%. The positive market sentiment was driven by data showing that the producer price index rose less than expected in June, marking the second consecutive day of encouraging inflation reports.

Investors took note of the improving inflation figures, which could alleviate pressure on the Federal Reserve to maintain its aggressive interest rate hikes. Despite the tight labor market, as highlighted by the declining jobless claims, signs of deceleration in inflation have prompted investors to scale back expectations of further rate increases this year.

Steve Englander, head of G10 FX research at Standard Chartered, expressed doubts about another rate hike after the Fed’s upcoming policy meeting in late July. Futures markets now indicate a one-in-three chance of an additional rate rise in the autumn, compared to a one-in-two chance before the release of the consumer price index (CPI) data.

The positive news on inflation also impacted government bond prices, leading to lower yields. The yield on the two-year Treasury note, which is sensitive to interest rate expectations, fell by 0.12 percentage points to 4.62%, while the benchmark 10-year yield declined by 0.1 percentage points to 3.76%.

The declining rate expectations had a negative impact on the U.S. dollar, which is on track for its worst week since November. The dollar index, measuring the currency against a basket of peers, fell 0.8% on Thursday, extending its slide from the previous Friday to 2.5%. In contrast, sterling made significant gains, hitting a 16-month high of $1.3122, following data that showed the UK economy contracted less than anticipated in May.

While investors remain cautious about the economic recovery, the signs of cooling inflation have led to more confidence in the markets. Analysts like Preston Caldwell, chief US economist at Morningstar, suggest that the broad-based deceleration in inflation supports the view that the Fed will engage in aggressive rate-cutting next year.

Global markets also experienced positive momentum, with Europe’s Stoxx 600 rising 0.6% and major Asian indices recording gains. Despite China reporting weaker-than-expected exports and imports in June, the CSI 300 index gained 1.4%, South Korea’s Kospi added 0.5%, and Japan’s Topix rose 1%. Hong Kong’s Hang Seng index surged 2.6%, while the Hang Seng Tech index rallied 3.6% after government officials expressed support for the tech sector.

As investors digest the latest inflation data, attention will turn to future economic indicators and corporate earnings. Friday’s reports on import and export prices in June, along with the University of Michigan’s preliminary reading on consumer sentiment in July, are expected to attract market attention. Additionally, investors eagerly await the quarterly results of financial giants Citigroup, JPMorgan Chase, and Wells Fargo.

Overall, the latest encouraging inflation data has provided a boost to U.S. stocks, highlighting a potential shift in the market sentiment as investors reassess expectations for future interest rate hikes and navigate the evolving economic landscape.

By: Montel Kamau
Serrari Financial Analyst
14th July 2023

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