TL;DR Breakdown
- Signs of slowing inflation boosted Wall Street, decreasing chances of a September interest rate hike by the Federal Reserve.
- S&P 500 and Nasdaq Composite marked substantial gains.
- The “core” PCE index dropped to a 20-month-low, signaling slowing inflation.
- US wage growth increased slower than expected in Q2.
Description
The specter of inflation, long regarded as Wall Street’s archnemesis, seems to be tempering its haunting wails. Signs of a slowdown in the relentless inflationary surge have sparked a celebration in the US equity markets, as the odds of an additional interest rate hike by the Federal Reserve in September dissipate. Stellar performance in Wall … Read more
The specter of inflation, long regarded as Wall Street’s archnemesis, seems to be tempering its haunting wails.
Signs of a slowdown in the relentless inflationary surge have sparked a celebration in the US equity markets, as the odds of an additional interest rate hike by the Federal Reserve in September dissipate.
Stellar performance in Wall Street’s equity market
Wall Street took the day with a flourish, the S&P 500 – the index often regarded as a mirror of the U.S. stock market – adding a feather to its cap with a 1% rise, rounding off its third consecutive week of gains.
Not to be outdone, the tech-focused Nasdaq Composite posted its finest day since late May with a 1.9% hike, registering an overall weekly gain of 2%.
Such an optimistic turn of events owes much to the US personal consumption expenditures, which slowed to a 3% annualized rate in June from May’s 3.8%. This report marks the weakest pace since March 2021 and coincided neatly with predictions of leading economists.
Even the more nuanced “core” PCE index, which deducts the fluctuating costs of food and energy to present a clearer inflation picture, eased to a 20-month-low of 4.1%. Perhaps even more telling of an impending deflation was the drop in goods prices by 0.6% from last June.
In another pleasant surprise, US wage growth, contrary to expectations, lagged in the second quarter. This development followed hot on the heels of a strong gross domestic product figure announced earlier in the week, rekindling hopes of inflation reverting to the Fed’s 2% target.
Bonds, global markets and oil
Meanwhile, US government bond prices edged upwards, causing a simultaneous drop in the yields of both the two-year and the ten-year Treasury notes.
Across the Pacific, investors mulled over the Bank of Japan’s decision to relax its controls on government bonds, hinting at wider trading bands on long-term yields.
Meanwhile, European markets maintained a low profile, despite Germany’s DAX index nudging to a record high, despite evidence of economic stagnation.
In other parts of Europe, inflation took a breather in France, quickened its pace in Spain, and met expectations in Germany. The European Central Bank, in response, nudged interest rates upwards in an attempt to reign in the region’s obstinate price pressures.
A game of give and take
The oil markets held their own, with international benchmark Brent crude recording a 0.9% increase, and the US West Texas Intermediate following closely with a 0.6% gain.
This week’s developments serve as a reminder that the world of finance is a delicate balancing act of optimism and caution, progress and setbacks.
While Wall Street celebrates the subsiding inflation, it cannot afford to lose sight of the evolving economic landscape. For now, the Wall Street party continues, fueled by the flames of inflation slowing down.
However, one must always be prepared for the next gust of wind that could either fan the flames higher or extinguish them altogether. As always, in the high-stakes game of economics, only time will tell.
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