U.S. markets rise as cold CPI data allays concerns about a recession
A cooler-than-expected inflation report decreased the likelihood that the Fed will raise interest rates by another 75 basis points next month, which provided rate-sensitive megacaps a strong lift. Wall Street strutted through the closing bell on Wednesday with significant gains.
Apple AAPL, Microsoft MSFT, Amazon.com AMZN, and Tesla TSLA drove the tech-heavy Nasdaq to its largest percentage gain so far this month as all three major U.S. stock indices closed strongly higher.
The Labor Department's CPI report, which revealed that inflation had decreased in July as lowering gasoline kept headline monthly price rise at zero while dramatically slowing year-over-year CPI to 8.5%, took centre stage of the day.
The better-than-anticipated reading decreased the likelihood that Powell & Co. would raise interest rates by 75 basis points for a third time in a row at the conclusion of its monetary policy meeting next month.
According to CME Fed funds futures, the probability of that happening has dropped from 68% before the publication to 43.5% today.
It appears that the CBOE Market Volatility Index VIX, also known as "the fear index," will close at its lowest level since April 4.
Small caps RUT, transports (.DJT), and economically sensitive chips SOX all outperformed the overall market but the broad surge lifted nearly all boats.
Growth stocks (.IGX), which climbed 2.8% and 1.5% on the day, respectively, were preferred by investors over value stocks (.SVX).
More inflation statistics will be available on Thursday and Friday in the shape of import prices and the PPI, which will provide a clearer indication of how much ground inflation still has to gain in order to reach Powell & Co.'s average annual 2% target.
Here is your final picture:
Aircraft arrive for a landing and take off (13:45 EDT/17:45 GMT)
Underneath the market-pleasing topline CPI figure was a welcome 7.8% monthly decrease in airfares, a category that has experienced significant swings recently as travel demand surges back, energy prices vary, and airlines deal with labour shortages and a lack of available seats.
The S&P 1500 Airline index (.SPCOMAIR) is up sharply today by 3.5%.
The sector continues to deal with rising traveller annoyance over increasing flight cancellations caused by a lack of workers. So much so that a bill to make it illegal for commercial carriers to advertise flights they know to be understaffed was presented on Tuesday in the US House of Representatives.
TSA throughput data, which provides a real-time snapshot of how many Americans remove their shoes as they pass through domestic airport security, reveals that yesterday's traffic was up 17.5% from the same weekday a year ago but down 12.0% from the same weekday in 2019, months before the word "Covid" entered our daily lexicon.
The graph below compares monthly CPI changes in flight fares with TSA throughput and SPCOMAIR throughput (click to enlarge):
The SPCOMAIR has lost 14% of its value so far this year, as opposed to the S&P 500's 12% loss during the same period.
The party may have peaked, but the hangover may yet occur (12:30 EDT/16:30 GMT).
Wednesday's report came in below forecast. The CPI figure for July fuels optimism that inflation may have peaked.
The S&P 500 SPX is rising by more than 1.5% as a result. The benchmark index is up more than 14% from its closing low on June 16, although it is still down slightly more than 12% from its record-breaking finish on January 3.
Even with the CPI decline, according to Scott Wren, senior global markets strategist at the Wells Fargo Investment Institute (WFII), it is more crucial to evaluate how "sticky" some components of the inflation calculation may end up being.
"While we may observe a discernible slowdown in headline CPI readings over the coming months, we continue to expect that inflation will decline only gradually, with rent price pressures and other longer-term contracts for goods and services continuing to have an upward impact on cost gauges."
According to Wren, the Fed has stated that combating inflation is "Job One." Wren does not anticipate the Fed will change course in response to lower headline inflation by stopping or curtailing the pace of its rate hikes this year.
The fed funds target rate, which is currently in the range of 2.25%-2.5%, will increase to the 3.5%-3.75% level at the end of this year, according to WFII. WFII anticipates that the FOMC will raise rates by 75 basis points in September, with subsequent, more gradual increases through the end of the year.
According to Wren, the Fed is willing to restrain economic expansion in order to lower inflation to a level of 2%-3%.
"We want to emphasise that a sharp decline in headline inflation readings could prematurely boost equity markets by giving investors the impression that the trend has permanently changed downward. Our prediction is that inflation won't decline as swiftly as it has increased. Still, a cautious portfolio strategy is advised."