4:11pm: Declining inflation doesn't mean the Fed won't hike rates, says MissionSquare Retirement CIO
The Dow closed Thursday up 28 points, less than 0.1%, at 33,337, while the Nasdaq dropped 75 points, 0.6%, to 12,780 and the S&P 500 shed 3 points to 4,207.
After a promising open, the major benchmarks all struggled in afternoon trading. Investors initially reacted positively to Producer Price Index data released this morning, which showed that PPI declined 0.5% in July, compared to expectations of a 0.2% increase. That sentiment didn't last, however.
“Investors, while they’re relieved that inflation is declining, it doesn’t change the fact that Federal Reserve will continue to be hiking rates," said Wayne Wicker, chief investment officer at MissionSquare Retirement, according to CNBC. "I’m not quite sure at this juncture that people want to give the all-clear sign, but I do think sentiment is much better than it was, say, 60 days ago."
Shares of The Walt Disney Company, meanwhile, jumped nearly 5% to $117.77 after the entertainment titan reported earnings and Disney+ subscriber numbers that beat expectations after the bell Wednesday. The company also said it plans to raise prices for the streaming service.
12.05pm: US stocks feel relief after weaker inflation readings
Two of the three major US indices remained higher at midday as traders were betting the US Federal Reserve could tone down its next interest rate hike as below-forecast PPI wholesale inflation numbers backed up Wednesday's CPI reading.
At midday, the Dow Jones Industrial Average was ahead 0.4% to 33,451, the S&P 500 was up by 0.3% at 4,222, but the Nasdaq Composite was down by 0.1% at 12,843.
A second consecutive day of weakening inflation readings have helped lift US markets, noted Chris Beauchamp, chief market analyst at online trading platform IG.
“After so long spent discussing surging prices, investors have been treated to two weaker inflation gauges in two days. A drop in factory-gate prices, which might be viewed as a bit of a leading indicator for CPI, helped to solidify the view that CPI has finished rising for now, taking the pressure off the Fed and others to keep hiking rates so quickly. Stock markets have recovered their forward momentum, and expectations of a fresh turn lower are now weakening by the day,” Beauchamp said.
At midday, the major movers included Devon Energy, up by 6%, plus Walt Disney and Pinduoduo, also ahead by nearly 6% respectively.
But on the downside, Pfizer shed 3.5%, Johnson and Johnson was off 1.3% and Altassian lost 3.4%.
9.35am: Inflation data welcomed with open arms
US stocks continued to build on Wednesday’s gains at the open buoyed by another batch of optimistic inflation data.
Just after the open, the Dow Jones Industrial Average had gained about 212 points at 33,522 points, while the S&P 500 was up 26 points at 4,236 points and the Nasdaq Composite was up 88 points at 12,943 points.
The Walt Disney Company (NYSE:DIS) had jumped about 8% after the company posted an earnings beat and streaming subscriber growth placing it just above its rival Netflix.
OANDA senior market analyst Craig Erlam said investors were certainly in a more upbeat mood as the relief from the US inflation data rippled through the market.
“Positive surprises have been hard to come by on the inflation front this year and yesterday's report was very much welcomed with open arms,” he said. “While we shouldn't get too carried away by the data, with headline inflation still running at 8.5% and core 5.9%, it's certainly a start and one we've waited a long time for.”
He noted that Fed policymakers remained keen to stress that the tightening cycle was far from done and a policy u-turn early next year was highly likely.
“Once again, the markets are at odds with the Fed's assessment on the outlook for interest rates but this time in such a way that could undermine its efforts so you can understand their concerns,” Erlam said. “That said, the inflation report has further fueled the optimism already apparent in the markets and could set the tone for the rest of the summer.”
9.00am: Wholesale inflation down as well
A day after US consumer price inflation saw a better than expected decline month-on-on-month, the latest wholesale inflation producer prices numbers have also pleased the market, with US July PPI falling 0.5% month-on-month, down from the prior month's 1.1% reading.
Alex Livingstone, Head of Trading - FX & ETFs at Titan Asset Management, commented: “The move lower reassures trader’s confidence in yesterday’s lower than expected CPI reading at 8.5%, as investors look for signs of peaking inflation. However, the chances of a Fed pivot on tightening policy look slim as inflation still remains over four times their 2% target, with the Fed still having a long tightening path ahead of them. The soft inflation prints have allowed the US Dollar to weaken slightly, but the modest bounce in the Asian trading session proves investors still aren’t convinced the US Dollar has lost its crown or that these readings are the final green light needed to reallocate away from the US just yet.”
Other data released on Thursday showed US initial jobless claims increase to a seasonally adjusted 262,000 last week from a revised 248,000 the previous week, the Labor Department said.
Last week’s total was slightly above the prior 2022 peak set in July of 261,000 and was above the 2019 weekly average of 218,000. The four-week moving average for initial claims, which smooths out weekly volatility, rose by 4,500 to 252,000.
US stock futures continued to push higher even after the strong gains which came following the CPI number relief on Wednesday.
Futures for the Dow Jones Industrial Average were trading up 0.8% pre-market, while those for the broader S&P 500 index and contracts for the tech-laden Nasdaq-100 both added 0.9%
6.30am: Rally continues
US stocks were expected to open higher on Thursday after the headline US inflation rate softened in July, suggesting that price pressures may be starting to ease.
Investors hope that Wednesday's CPI data means that inflation has already hit its peak and US rate-setters will scale back future interest rate hikes.
Futures for the Dow Jones Industrial Average were trading 0.4% higher pre-market, while those for the broader S&P 500 index were up 0.3%, and contracts for the tech-laden Nasdaq-100 added 0.2%.
Notably, the Nasdaq composite index has clawed its way back into bull market territory, defined as a 20% rise from recent lows.
“The slower-than-expected inflation figure revived the hope that last month’s 9.1% was maybe a peak, and we could see a potential reversal in inflation trend. And if that’s the case, the Federal Reserve could slow down its rate hikes, or opt for smaller hikes,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
The US CPI stayed close to four-decade highs in July but was lower than expected at 8.5% year-over-year. Analysts had been expecting a reading of 8.7%, down from the 9.1% recorded in June.
While the data has brought some cheer to equity markets and driven down bond yields, it is too soon to say that US rate-setters have succeeded in dampening price pressures.
“Two FOMC members warned, right after the data, that the war against inflation is not won just yet. It’s of course great to see the latest inflation print come lower-than-expected, but first, one data point doesn’t make a trend, and we had a similar surprise earlier this year, but then inflation spiked to fresh multi-decade highs the following month,” said Ozkardeskaya.
It is also worth noting that the softening in the headline number for July was driven by lower energy prices, she noted, adding that food prices have continued to rise.
Still, the feel-good vibes from the data continue to be felt and activity on the Fed Fund Futures suggests a scaling back in rate hike expectations 50 basis points at the next rate-setting meeting from 75 basis points previously, she added.
Contact the author at jon.hopkins@proactiveinvestors.com