Rosalind Evans
Wall Street continues to trend upward this Thursday, bolstered by the latest indications that inflationary pressure on the economy is gradually easing.
As of midday trading, the S&P 500 rose by 0.6%, marking its seventh positive week in the last nine. The Dow Jones Industrial Average climbed 61 points or 0.2%, standing at 34,408, and the Nasdaq composite saw an increase of 1%, led by a solid performance from Big Tech stocks.
Recent data suggest that cooling inflation contributes to a growing confidence that the Federal Reserve may soon halt its aggressive streak of interest rate hikes. Wholesale-level inflation slowed more than anticipated in June, with producer prices only 0.1% higher than a year earlier, a significant drop from last summer’s 11.2% inflation.
Investor fears of a potential recession have been primarily driven by high inflation, exacerbated by the Federal Reserve’s significant interest rate hikes aimed at controlling price increases. Higher rates have a dual effect of slowing the economy overall and increasing the risk of recession while negatively impacting investment prices.
Despite these concerns, traders expect the Federal Reserve to increase the federal funds rate at its meeting in two weeks, potentially bringing it to its highest level since 2001. However, the recent inflation data is encouraging traders to wager that this might be the final rate hike for this cycle.
Consumer price data released on Wednesday showed that inflation was 3% higher in June than the previous year, a decline from over 9% last summer. Treasury yields in the bond market further declined as expectations for future Fed rate hikes also diminished.
The eased interest rates are expected to benefit various investments. However, many investors anticipate that large technology and other high-growth stocks will be the primary beneficiaries.
Big Tech giants like Amazon, Alphabet, and Nvidia contributed significantly to the S&P 500’s surge. Amazon’s share price grew 1.9% after the company announced that the first day of its annual Prime Day event marked its most significant sales day ever. Alphabet’s shares increased by 4.3% after the expansion of its AI-powered chatbot, Bard, and the introduction of new features. Nvidia, a key player in AI, saw a 2% rise in its stock price.
Additionally, PepsiCo shares increased by 0.9% after exceeding analysts’ profit expectations for the spring quarter. Despite decreased demand for drinks and snacks, the company boosted its earnings through higher prices and increased its full-year forecast.
With the earnings reporting season about to begin, JPMorgan Chase is set to kick off a wave of bank reports on Friday, revealing their spring earnings. Analysts predict a sharp decline in earnings for S&P 500 companies, the steepest since the 2020 global economic crisis caused by the pandemic.
However, these lower expectations also provide companies with lower bars to exceed, potentially adding momentum to a strengthening Wall Street amidst rising hopes that the U.S. economy can avert a long-anticipated recession.
The resilient job market has been a crucial support for the economy. A recent report showed fewer workers filing for unemployment benefits last week than expected. Nevertheless, a too-robust job market could lead the Federal Reserve to intensify its interest rate hikes due to fears of inflationary pressure.
Despite encouraging signs from inflation, Chun Wang, senior research analyst and co-portfolio manager at Leuthold, warns that Wall Street might be prematurely concluding that the Federal Reserve will relax its rates to avert a recession. He suggested that the market may be underestimating the risk of inflation remaining at 3% to 4% over the next six to 12 months and that the Federal Reserve’s policy and inflation trajectory is not straightforward.
Wednesday’s trading day saw a minor setback for Exxon Mobil, which dropped by 1.1% following its announcement of acquiring Denbury, owner of carbon dioxide pipelines, for $4.9 billion in stock, causing Denbury’s shares to slip by 0.5%.
Asian markets responded positively, with Hong Kong’s Hang Seng increasing by 2.6% and Shanghai’s stock exchange gaining 1.3%, despite China’s reported slump in June’s trade figures.
The Kospi rose by 0.6% after the Bank of Korea left its policy interest rate unchanged, indicating that the inflation risk was resurging. European stocks observed modest gains.
Wall Street continues to demonstrate resilience amid economic fluctuations. Eased inflation pressures and favourable business performances have boosted the market, but experts caution that the path ahead is not specific. The upcoming decisions of the Federal Reserve and the unfolding economic data will be crucial in shaping the course of the market. As companies report their earnings and central banks across the globe react to shifting economic landscapes, traders and investors will need to stay vigilant to adjust their strategies accordingly.
