Rebound in Risky Assets Amid Cooling Inflation

It was a positive week for equity and bond markets, as investors enthusiastically responded to better-than-expected inflation numbers in the U.S. According to data released on Wednesday, the consumer price index for June registered a 3% annual increase, down from May's 4%, before seasonal adjustment. This figure fell below economists' predictions of 3.1%. Inflation in the U.S. is now at its lowest level since March 2021, illustrating the impact of the rapid ascent of interest rates.

With Jerome Powell previously signalling that the Federal Reserve plans to raise interest rates at the forthcoming meeting on July 25th-26th, the latest data has diminished the likelihood of a subsequent rate hike before year-end. The market found solace in the moderation of core inflation, stripping out volatile food and energy prices, which dropped from 5.3% in May to 4.8% in June. Consequently, investors are now envisioning a lower peak for interest rates and a shorter duration of elevated rates.

This lowering of interest rate expectations caused the greenback to fall against most major currencies. The dollar index fell 2.27% week-over-week to 99.95, after dropping earlier to 99.50, a new 15-month trough.

By contrast, Wall Street’s main stock indexes were in rally mode. The Dow Jones Industrial Average rose 774 points, or 2.29%. The S&P 500 closed higher by 106 points, or 2.42%, at 4,505.42, while the Nasdaq Composite gained 453 points, or 3.32%, to 14,113.70 at closing.

Bond indexes were also in the ascendency as Treasury yields tumbled after the inflation report. The U.S. 10-year Treasury yield was down 24 basis points week-over-week from 4.07% to 3.83%. The yield on the 2-year Treasury closed at 4.77% after falling by nearly 18 basis points.

Back in Europe, stock indexes rose in unison with their U.S. peers. The MSCI EMU gained 3.47% while the FTSE was up 2.45%. In Asia, China's latest inflation data for the month of June has caught analysts off guard, as the consumer price index (CPI) remained unchanged from the same period last year. Concurrently, annual producer prices sank 5.4% in June, marking the most significant drop since December 2015. Furthermore, Chinese exports and imports which recorded a significant fall last month, surpassing expectations, reinforce this disinflationary trend. These numbers suggest Beijing will look to ease monetary and fiscal policy further. The Shanghai Composite index gained 1.29% for the week. In contrast, Japan’s Nikkei was flat (+0.01%).

All S&P sectors post positive returns

The communication services and consumer discretionary sectors saw the largest gains in the extended bull market, up 3.36% and 3.31% respectively.

Meta Platforms (META, up 6.31% for the week) and Alphabet-Google (GOOG, up 4.63%) were the main contributors to the performance of the S&P communication services index. Embracing the momentum of artificial intelligence, Meta is preparing to unveil a commercial iteration of its AI large learning model. Previously exclusively available to researchers and academics, this move showcases Meta's commitment to advancing AI technology on a wider scale. Adding to the positive sentiment surrounding Meta, TD Cowen recently upgraded their outlook for the social media giant from "perform" to "outperform." Meanwhile, in a bid to fortify its presence and compete head-on with ChatGPT, Alphabet has introduced Bard AI in both Brazil and the European Union. The tech giant's strategic move demonstrates its commitment to entering the AI fray and leveraging the immense potential of this transformative technology.

The consumer discretionary sector was boosted by Amazon (AMZN) stocks, up 3.78% for the week, after the company reported that U.S. online sales from its Prime Day promotional campaign jumped 6.1% to $12.7 billion.

Financials gained 1.96% on average. JPMorgan Chase & Co (JPM) and Wells Fargo (WFC) reported quarterly results that beat on the top and bottom lines.

All the other S&P sectors also fared well except for energy. The worst performer in 2023 (down 7.34% year-to-date) edged up 0.58% even though the WTI crude oil price was up 2.11%, just above $75/bbl, extending its winning streak to three weeks. Data from the American Petroleum Institute cooled the rally as U.S. crude stockpiles unexpectedly grew by over 2 million barrels in the week to July 7.

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