US stocks recover after reading inflation forecast

U.S. stocks rallied on Wednesday after data showed inflation in the world’s largest economy had stabilized, stoking hopes that the Federal Reserve could adjust to aggressive interest rate hikes. to reduce the price is skyrocketing.

Client prices in the US increased by 8.5% year-over-year in July, growth was slower than June and below economists’ forecasts of 8.7%. Data released on Wednesday also showed that on a monthly basis, there was no increase in inflation in July compared with a 1.3% monthly increase in June.

The figures helped accelerate a two-month recovery in financial markets, as traders bet the Fed could make smaller rate hikes in the coming months as policymakers try to slow down the economy without causing a painful recession.

Line chart August 10, 2022 (%) showing US stocks rebound as inflation data falls short of expectations

The S&P 500 blue-chip stock index rose 2%, rising from a year-end sell-off to more than 15%. The index has now recouped about half of its losses for the year, although US stocks are still worth $8.6 billion less than they were at the start of the year.

The tech-heavy Nasdaq Composite rose 2.7%, while shares of smaller companies, as recorded by the Russell 2000 index, rose 2.7%.

Combined market valuation line chart of publicly traded US companies ($trillion) shows the Rally has added more than  billion to the value of US equities from June lows

Indices of volatility, which have been elevated since Russia’s invasion of Ukraine and rising odds of a U.S. recession starting to rattle investors, have also fallen. The Vix Index of expected stock market volatility fell below its long-term average of 20 for the first time since April.

“Inflation has been forecast to peak in the summer for some time, so markets can rest assured that there are clear signs,” said Oliver Blackbourn, portfolio manager at Janus Henderson Investors. shows this is happening.”

Prices for two-year US Treasuries, which are particularly sensitive to changes in the Fed’s interest rate policy, rose in value following the inflation report.

The recovery pushed bond yields down 0.07 percentage points to 3.2 percent. The yield on the benchmark 10-year Treasury note, changed by inflation and growth expectations, was little changed at 2.79%.

The US dollar, a haven for investors in times of uncertainty, also fell back in response to the data, falling 1.3% against a basket of six currencies.

The US inflation benchmark has reached 9.1% in June – a 40-year high – prompts the Fed to deliver a consecutive super-favorite rate hike to 0.75 percentage points over the summer.

However, inflation data shows prices are still well above the US central bank’s 2% target.

Mike Bell, global market strategist at JPMorgan Asset Management, said: “While peak inflation is welcome news, it is probably not enough to allow the Fed to ease tightening or soften it. recession anxiety”.

Core inflation, a measure of price growth that excludes volatile categories including energy and food, also fell short of expectations, remaining at the 5.9% it hit in June and much lower than the peak in March of 6.5%.

“I think this could be a new bull market as opposed to a bear market rally. Eventually the Fed will pivot, growth will have to slow down,” said Patrick Spencer, vice president of equities at Baird.

However, others warn that inflation remains high. Brian Nick, chief investment officer at Nuveen, said: “It would be nice to see a report come out in cooler times, but we’ll leave the champagne bottles closed for now.”

In Europe, the Stoxx 600 closed up 0.9% and the German Dax index gained 1.2% after falling in the previous session.

The plunge in technology shares dragged indexes in Asia lower, closing ahead of the release of CPI data. Hong Kong’s Hang Seng closed down 2%, China’s CSI 300 benchmark for Shanghai and Shenzhen-listed stocks fell 1.1% and Japan’s Topix closed down 0.2%.

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