4:33pm: S&P 500 hits highest level since May
The Dow finished Wednesday up 535 points, 1.6%, at 33,310, the Nasdaq Composite jumped 361 points, 2.9%, to 12,855 and the S&P 500 improved 88 points, 2.1%, to 4,210.
The S&P 500 hit its highest level since May thanks to a broad rally brought on in part by positive reactions to July's Consumer Price Index data released Wednesday morning. According to the Bureau of Labor Statistics, the CPI came in 8.5% higher year-over-year, compared to Street expectations of 8.7% and last month's figure of 9.1%.
That has big potential implications for next month's Federal Reserve meeting, according to Nancy Davis, founder of Quadratic Capital Management.
“The deceleration in the Consumer Price Index for July is likely a big relief for the Federal Reserve, especially since the Fed insisted that inflation was transitory, which was incorrect," Davis said, according to CNBC. "If we continue to see declining inflation prints, the Federal Reserve may start to slow the pace of monetary tightening."
12.05pm: US stocks continue green streak at midday
All three major US indices were up at midday, as traders felt positive about key inflation data in the Consumer Price Index (CPI) for July.
At midday, the Dow Jones Industrial Average jumped up more than 500 points to 33,300, the S&P 500 was up by 2.0% at 4,206, and the Nasdaq Composite was up by 2.5% at 12,828.
James Knightley, chief international economist with ING, said US inflation has passed its peak.
“A rare pleasant surprise from the CPI report with headline inflation dropping to 8.5% year-over-year from 9.1% on lower fuel prices, airline fares, clothing and education costs. Ongoing falls in gasoline will mean the headline rate falls further in August, but core inflation is likely to be stickier due to labour costs and will keep the Fed firmly in tightening mode,” Knightley said.
He noted this report should: “provide support to the notion that the US has now passed the peak for headline inflation with lower gasoline prices, down a dollar a gallon nationally on their June 13 peak, set to have a more substantial impact in the August inflation print.”
That said, Knightley warned this optimism could change in the near future, as there will be another jobs report and another inflation report ahead of the September 21 Federal Open Market Committee meeting.
At midday, the major movers included Norwegian Cruise Lines in a reversal of yesterday’s slump, up by 13.5%, and cloud security company Zscaler, up over 9%.
On the downside, Merck and Co fell 0.7%, JD Com was down 1.6% and CME Group (NASDAQ:CME) lost 1.7%.
9.35am: Stocks fly as analysts warn of continued interest rate hikes
US stocks soared at the open on Wednesday as investors celebrated better-than-expected consumer price index (CPI) data for July which showed that inflation may have peaked in the US.
Just after the open, the Dow Jones Industrial Average had gained 444 points or 1.4% at 33,213 points. The S&P 500 had jumped 66 points or 1.6% at 4,188 points, while the Nasdaq Composite was up 257 points or 2.1% at 12,748 points.
Saxo Markets global sales trader Mike Owens said that a sign of a slowing in the rate of inflation offered hope the Federal Reserve’s rate increases wouldn’t need to go as far as previously thought.
However, he noted: “[This equity rally] may be short-lived if the market returns its attention back to the Fed. One month of data won’t change their current hawkishness as it stands by its mission to force inflation down.”
Evelyn Partners investment strategist Rob Clarry agreed, noting that today’s data did not change the firm’s view that US interest rates would continue to rise.
“More substantial falls in inflation and a softer labor market will probably be required before we get any signs of the Fed changing course,” he said.
“With the Fed prioritizing inflation over growth, we expect the US economy to continue to slow. Investors should protect their portfolios against this risk.”
8.40am: Inflation may have peaked, new data suggests
While inflation in the United States remains near the highest level in four decades, new data from the US Bureau of Labor Statistics shows it may finally be cooling with the headline consumer price index (CPI) for July coming in at 8.5% year-over-year.
Analysts had been expecting a reading of 8.7%, down from the 9.1% recorded in June.
The Bureau noted that the gasoline index fell 7.7%, offsetting increases in the food and shelter indexes.
Titan Asset Management chief investment officer John Leiper said there were growing signs that inflation may have started to peak, citing falling commodity prices, the recent collapse in US housing demand, and the slowing of money growth and wage growth. "That said, we shouldn’t read too much into just one [CPI] print and a decline in the headline number is to be expected given how far energy prices have fallen over the last month," Leiper said.
"The real focus is on underlying inflation and that’s where things get interesting. Core inflation in July also came in below expectations at 0.3% versus 0.5% consensus and 0.7% prior. The US dollar is selling off on the news with bond yields falling across the curve and US equity futures soaring."
Shortly after the release of the inflation data, futures for the three major US stock indexes remained in positive territory with the Dow Jones Industrial Average up 0.3%, the S&P 500 up 0.4%, and the Nasdaq Composite up 0.6% in pre-market trading.
6.30am: Inflation in focus
US stocks were expected to open higher on Wednesday, rallying after falls in the previous session, ahead of pivotal US inflation data for July which is expected to remain close to four-decade highs.
The question of whether inflation has reached its peak remains unanswered and a forecast-beating headline CPI figure could well stoke expectations of further interest rate increases and weigh on stocks, while a softer reading will likely drive stocks higher.
Futures for the Dow Jones Industrial Average were trading 0.2% higher pre-market, while those for the broader S&P 500 index were also up 0.2%, and contracts for the tech-laden Nasdaq-100 added 0.3%.
“Today is probably the most important day of the week in terms of economic data, as the US will reveal its latest CPI data, and investors have high expectations of seeing a softer figure in July,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
“The US CPI data is expected to have slowed to 8.7% in July, from 9.1% printed a month earlier. The recent downside correction in energy and commodity prices, the sharp fall in inflation expectations, as released by the New York Fed yesterday, and deflation in online goods prices point that we may see some relief on consumer prices of last month,” she added, noting, however, that rising wages and high rents remain factors that could keep inflation elevated.
Overall, given that expectations are in favor of a softening in price pressures, any disappointment could well trigger an equity sell-off.
On the other hand, if inflation comes in as predicted or a little softer, some of the hawkish expectations for interest rates would be tempered, argued Ozkardeskaya, leading to lower US bond yields and a relief rally across stock markets.
“We could then see the S&P 500 make another attempt on the critical 4200 resistance," she concluded.
In energy markets, oil prices were lower, indicating that energy-led inflation may be easing. WTI crude futures were down 0.92% at $89.67 a barrel, while Brent crude futures were down 0.92% at $95.42.
“Good news was that the US oil inventories rose by more than 2 million barrels last week, versus a decline around 400,000 barrels expected by analysts,” noted Ozkardeskaya. “Oil bulls are also quiet this week, as US and Iran could finally reach a nuclear agreement, which would then unlock the Iranian oil and give a certain relief to the tight-supply market.”
Contact the author at jon.hopkins@proactiveinvestors.com