Global equities rallied on Wednesday after U.S. inflation data was softer than expected.
For the month of July, headline prices were unchanged compared to estimates of a +0.2% increase while core prices rose +0.3%, less than the +0.5% expected. Over the year, core price rose +5.9% and headline prices gained +8.5%, both below analyst’s forecasts of +6.1% and +8.7% respectively. Head of macro at Lombard Odier Asset Management Florian Ielpo noted “This is overall good news for risky assets…a lower growth rate of prices does not mean the end of inflation, and naturally the end of hawkish central banking. Inflation remains a situation that requires the Fed’s attention and more importantly the Fed’s measures”.
The S&P500 climbed +2.13% in broad-based buying with 92% of stocks rising and all sectors positive paced by materials +2.88% and consumer discretionary +2.87%. The Dow Jones also gained +1.63% as did the Nasdaq Composite +2.89% and Russell 2000 +1.88% with the VIX tumbling -9.32% to 19.74. European equities were also broadly higher with the Euro Stoxx 600 rising +0.89% along with the DAX +1.23%, CAC +0.52% and FTSE100 +0.25% with benchmarks higher across the region.
In response to the data, two Federal Reserve officials said the softening in inflation doesn’t change the likely path of interest rates with Neel Kashkari of the Minneapolis Fed said “I haven’t seen anything that changes that” referring to his view rates should reach +3.9% by year-end and +4.4% by the end of 2023. Chicago Fed President Charles Evans noted inflation remains “unacceptably high” and expects “that we will be increasing rates the rest of this year and into next year to make sure inflation gets back to our 2% objective”. The 2-year Treasury yield declined -5.1 basis points to 3.218%, paring back early declines of as much as -20 basis points, while the 10 and 30-year yields rose +0.4 and +4.0 basis points respectively. Traders modestly pared back expectations of a +0.75% increase at the Fed’s September meeting, with futures implying a +0.625% increase suggesting a +0.5% rate hike is an increasing probability.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX looks set to open decisively higher this morning with ASX200 futures up +71 points or +1.03% to 6,951. The index finished -0.53% lower on Wednesday weighed by materials -1.05% and health care -1.49% while utilities +0.90% and financials +0.53% were the top performing sectors. Shares in biotech Imugene climbed +9.6% after announcing progress in U.S. clinical trials of a cancer treatment. CBA rose +0.3% after releasing financial year results that showed a boost to profits of +11% to $9.6 billion. Elsewhere shares in GrainCorp climbed +5.1% after issuing a profit upgrade, now expected underlying EBITDA for the year to September 30 of between $680-730m compared with earlier expectations of $590-670m. The Australian dollar is +1.61% higher overnight at 0.7078 while the 10-year yield climbed +6 basis points to 3.244%.
Oil prices rose overnight with both WTI and Brent crude +1.23% and +0.87% higher at US$91.61 and US$97.15 respectively. The move higher comes as a larger than expected draw of -4.978m barrels of gasoline vs -633k expected for the week ending 5th August offset a larger increase of +5.458m barrels of crude oil compared to forecasts of +73k. Iron ore futures in Singapore gained +0.27% on Wednesday and are a further +1.84% higher this morning at US$111.90 with copper futures also gaining +1.45%. Gold edged -0.13% lower to US$1,791 an oz, while silver rose +0.33% and Bitcoin gained +2.84% to US$23,801.
Economic data:
- Australian Consumer Inflation Expectations (MoM Aug) 11:00
- Chinese New Yuan Loans (MoM Jul) 18:00
- U.S. Producer Prices (MoM Jul) 22:30
- U.S. Initial Jobless Claims (Aug 6th) 22:30
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
