Markets post sharp gains on a softer U.S. CPI inflation data

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Vrasidas Neofytou
Head of Investment Research

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Markets post sharp gains on a softer U.S. CPI inflation data
US stock markets jumped by more than 2% on Wednesday, surging to the highest in two months following the softer than expected US CPI inflation reading for July, which stoked speculation that the Federal Reserve could pivot to a shallower pace of interest-rate hikes.

The CPI-consumer price index, which tracks the prices that consumers pay for a variety of goods and services rose 8.5% in July from a year ago, which was lower than market expectations of an increase of 8,7%, and much lower than June’s reading of 9,1%, the highest inflation level since the early 1980s.

The easing of inflation was based on the falling energy prices, with gasoline breaking below $4 a gallon, much lower than the peak of $5 a gallon on the pump a few weeks ago, following the drop of the U.S-based WTI crude oil prices below the $90/b level for the first time after the Russian invasion of Ukraine on late February.

The cooler CPI reading has raised traders' hopes that the Federal Reserve may soon moderate the pace of its campaign of interest-rate increases, boosting the appetite for beaten-down assets such as growth stocks and cryptocurrencies, and adding pressure on the monetary-sensitive bond yields and dollar.

The expectations of a less hawkish Federal Reserve have pushed the 10-year Treasury yields to as low as 2,75%, down about 75 basis points from their June peak of 3,50%, while the DXY-U.S. dollar index fell below 105 level, almost 4% down from multi-year highs of 109,3 on mid-July, as the softer CPI data dropped the Fed funds futures to a 43% probability of a 75-bps rate hike at the next FOMC meeting on September 21, down from 63% probability of pre-CPI data.

Wednesday’s inflation numbers have increased the appetite for risk, with the tech-heavy Nasdaq Composite gaining 3% led by huge gains in tech giants, while the S&P 500 index added more than 2% led by construction and retail shares since both tech and economic growth asset classes are benefiting from the lower interest rates and the higher future cash flows.

Nasdaq Composite, Daily chart

As a result, the Nasdaq Composite and the S&P 500 index are now up more than 20% and 15% from their mid-June lows respectively, with the tech-focused index officially re-entering a new Bull market as investors are jumping into the beaten-down growth-sensitive tech stocks that have dumped earlier this year.

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