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Stocks up for 4th straight week as CPI cools down
US equities rallied after data showed signs that US consumer prices, while still elevated, had started to slow, supporting the view that inflation might have peaked. Headline CPI came in flat month over month and below the consensus estimate. On an annualized basis, headline inflation was 8.5%. Core inflation, which excludes volatile food and energy costs, was also below estimates. Meanwhile, the year-over-year increase in the producer price index fell 50 basis points sequentially to 9.8% in July, registering the first pullback in the headline number since April 2020. Fed officials reiterated that there is still work to do but investors are now pricing in lower rate hikes this year. All the sectors in the S&P 500 advanced, led by energy stocks. Small caps outperformed large caps. In Fixed Income, the US yield curve steepened as the front-end eased while longer-term yields rose modestly. In Europe, the STOXX Europe 600 Index ended the week 1.2% higher as fears of more aggressive interest rate hikes eased. Industrial production in the euro area rose for a third consecutive month in June. Months of drought in Europe are severely affecting energy production, agriculture, and river transport. UK economy shrinks less than feared; rates may have to rise again, says BoE’s Ramsden. In Asia, Chinese stocks markets ended the week on a mixed note as a flare-up in covid cases offset news of a record trade surplus last month and a central bank report signaling support for growth.
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Most of US equities indices rose to record highs, as investors wagered that a “red sweep” (Republicans winning Presidency, Senate and Congress) would result in faster earnings growth, looser regulations, and lower corporate taxes. The small-cap Russell 2000 Index surged 8.57% for the week but was the sole benchmark to remain out of record territory. Meanwhile, the Dow Jones hit 44.000 for the first time while the S&P 500 closed just shy of 6,000, up 4.7% for the week, its best weekly gain in almost a year. On Thursday, the Fed announced a 25bps rate cut, its first easing move since cutting rates by 50 basis points in mid-September. In terms of economic data, the October ISM services sector activity came in at 56.0, well above expectations and the best reading since August 2022. U.S. Treasuries generated positive returns heading into Friday, as yields largely ended lower than where they ended the previous week.