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In a surprising turn of events, US stocks and Treasuries surged while the dollar plummeted in response to lower-than-expected inflation figures for June. This has relieved some of the pressure on the Federal Reserve to continue raising interest rates.
Yesterday, Wall Street’s S&P 500 index hit its highest point since April 2022, closing 0.7% higher, driven by gains in the tech and utilities sectors. The tech-heavy Nasdaq Composite also saw a gain of 1.2%.
The yield on the two-year Treasury note, which reflects interest rate expectations, experienced a decline of 0.16 percentage points to 4.74%. Meanwhile, the yield on the 10-year note decreased by 0.12 percentage points to 3.86%. It’s important to note that bond yields move inversely to prices.
Simultaneously, the dollar’s strength against a basket of six peers dropped by 1.2% to reach its lowest level in 15 months.
These market reactions were triggered by data showing that US inflation fell to 3% in June, marking its lowest annual level since March 2021. This decline was slightly below economists’ predictions of 3.1%.
The “core” inflation rate, which excludes volatile food and energy prices, also decreased to an annual rate of 4.8% in June, further surpassing forecasts of 5.3%.
Sebastian Vismara, a global macroeconomist and strategist at BNY Mellon Investment Management, stated, “There are various ways of torturing the data, but everything is pointing to a deceleration in the momentum of inflation.” He added, “Any way you cut it, this release is positive for the Fed and the market.”
Neil Birrell, chief investment officer at Premier Miton, pointed out that “the chances of the Fed pulling off what many thought was impossible are rising: growth is robust and inflation is falling.”
Market expectations still suggest that the Fed will raise rates by 0.25 percentage points during its upcoming meeting at the end of this month. This would follow the decision to not raise rates in June, the first time in over a year. Traders anticipate the central bank pausing after the July meeting in a range between 5.25% and 5.5%.
Jason Ware, chief investment officer at Albion Financial, expressed his opinion, stating, “I think the Fed has done enough. Going from 0% to 5 plus per cent in 14, 15 short months, plus doing [quantitative tightening], as well as stress in the regional banking system this spring… all of those things are going to take time to truly show up in the economy.”
There is a divide among investors regarding the possibility of a recession in the US. Jason Draho, head of asset allocation for the Americas at UBS Global Wealth Management, used a metaphor to illustrate the situation, “Think of the economy and the markets as coming to a fork in the road, with one path headed towards a soft landing and its corresponding positive market implications, and the opposite for the other path ending in a recession.”
In Europe, the region-wide Stoxx 600 advanced by 1.5%, while France’s Cac 40 gained 1.6% and London’s FTSE 100 rose 1.8%.
Asian markets displayed mixed results. China’s CSI 300 and Japan’s Topix both experienced a decline of 0.7%, but Hong Kong’s Hang Seng index rose by 1.1% and South Korea’s Kospi added 0.5%.
In the commodity markets, Brent crude oil surpassed $80 a barrel for the first time since May. This rise can be attributed to significant production cuts by Opec+ and expectations of an increasing supply gap in the second half of the year.
Additional reporting by Nicholas Megaw in New York
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