US Stocks Drive Higher After Weaker Inflation Data – Nasdaq up 0.9%
US equity markets finished modestly higher overnight as softer-than-expected inflation data boosted investor sentiment, helping offset ongoing concerns surrounding escalating hostilities in the Middle East. The weaker inflation reading prompted traders to scale back expectations of a July interest rate hike from the Federal Reserve, driving Treasury yields lower and weighing on the US dollar.
The technology sector once again led the gains, with the Nasdaq rising 0.90% to close at 26,107. The broader S&P 500 added 0.38% to finish at 7,543, while the Dow Jones Industrial Average edged 0.02% higher to close at 52,508.
The US Dollar Index fell 0.33% to 100.94 as lower bond yields reduced support for the greenback. US Treasury yields moved lower across the curve, with the 2-year yield falling 8.9 basis points to 4.193%, while the benchmark 10-year yield declined 3.5 basis points to 4.589%.
Commodity markets remained firmly focused on geopolitical developments. Oil prices climbed to one-month highs after the United States reinstated its naval blockade on Iran, fuelling fresh concerns over potential supply disruptions through the Strait of Hormuz. Brent crude gained 1.72% to settle at US$84.73 per barrel, while WTI crude rose 0.71% to US$79.90 per barrel.
Gold also benefited from the softer US dollar and ongoing geopolitical uncertainty, rallying 1.33% to close at US$4,053.89 per ounce as investors increased their exposure to traditional safe-haven assets.
Fundamentals to Battle with Geopolitics on Fed Expectations
Yesterday’s much weaker-than-expected CPI data print in the US has pulled back expectations of a Fed rate hike in two weeks’ time. However, the re-escalating conflict in the Middle East between the US and Iran, and the consequent rise in energy prices, still has investors concerned that inflation could pop again in the coming months. Betting has dropped from over 40% for a 25-basis-point hike before the CPI print to 15% after the data release. However, the odds that we will see a hike by the September meeting remain little changed at around 50%. These odds look set to move swiftly in the coming days, and markets with them, with more inflation data out today while the market maintains a close watch on the Middle East and the Strait of Hormuz. Expect geopolitics to trump fundamentals if the conflict worsens and oil drives higher, while any calming of the situation could combine with the recent data to pull back rate hike expectations significantly.
More US Inflation Data and Bank of Canada Ahead
Investor focus is likely to remain on developments in the Middle East throughout the Asian and European trading sessions today before shifting back to economic fundamentals during the US session. There is little on the cards in the first two trading sessions of the day. However, markets will closely watch the release of US Producer Price Index (PPI) (exp. +0.5% m/m, Core +0.3% m/m) data early in the New York session for further clues on the inflation outlook after yesterday’s much weaker-than-expected CPI update. Focus will swiftly move north of the border for the Bank of Canada’s latest interest rate decision, where they are expected to hold rates at 2.25% before Governor Tiff Macklem holds his post-meeting press conference.
