US Markets Rally as Rate Hike Expectations Fall – Nasdaq up 0.8%
US equity markets rallied strongly in trading yesterday, with further signs of easing inflationary pressure helping reinforce expectations that the Federal Reserve will keep interest rates on hold at its next meeting. The S&P 500 gained 0.65% to close at a fresh record high of 7,798, while the technology-heavy Nasdaq outperformed, rising 0.81% to 26,803. The Dow Jones also moved higher, adding 0.13% to finish at 53,839.
The softer inflation outlook, which kicked in after PPI data came in well below expectations, saw US Treasury yields fall across the curve, with the 2-year yield declining 5.9 basis points to 4.142% and the benchmark 10-year yield falling 5.7 basis points to 4.643%. The US Dollar was largely unchanged, with the US Dollar Index edging 0.02% lower to 99.95 as traders continued to balance the less hawkish interest-rate outlook against ongoing geopolitical risks.
Oil prices moved sharply lower despite continued hostilities across the Middle East, with signs of weaker global demand weighing on energy markets. Brent crude fell 2.17% to US$87.05 a barrel, while WTI declined 2.43% to US$81.25. The move highlights the ongoing battle between concerns over potential supply disruptions from the Middle East and growing questions over the strength of global demand.
Gold also pulled back from recent resistance levels, falling 1.29% to US$4,350.16 an ounce. The stronger performance from equities and continued stability across broader markets reduced some of the demand for traditional safe-haven assets, although geopolitical risks remain firmly in focus.
Fed Rate Hike Expectations Fall on Weaker Inflation Data
Expectations of another Federal Reserve interest rate hike have fallen sharply over the past week as a run of softer US economic data has forced traders to reassess the outlook for monetary policy. The move began with last week’s unexpectedly weak employment report and has gathered further momentum following this week’s CPI and PPI releases.
July consumer inflation showed headline CPI easing to 3.4% year-on-year from 3.5% in June, while core CPI also slipped to 2.5%. The follow-through from Thursday’s PPI release was even more supportive for the dovish argument. US producer prices were unchanged in July, well below expectations for a 0.2% increase, while the annual rate slowed to 4.7% from 5.5% previously.
Market pricing has responded quickly. Expectations for a September hike had been around 55% at the start of the week but have now fallen to roughly 35%, with the probability of rates remaining unchanged continuing to increase. US yields fell yesterday; however, the dollar remained relatively strong, with traders giving some pause for thought as they keep a wary eye on developments in the Middle East that could see inflation pick up in the coming months.
Geopolitical Developments to Dominate into the Weekend
Geopolitical developments are once again expected to dominate market sentiment as we head towards the weekend, with traders continuing to monitor developments across the Middle East. However, there is still scope for some volatility from the economic calendar, with some key US data due out later in the day.
There is little on the calendar in the first two trading sessions of the day today; however, the focus will then shift to the US later in the day, with Retail Sales (exp +0.1% m/m, Core +0.2% m/m) due early in the session. Preliminary University of Michigan Consumer Sentiment (exp 54.7) and Inflation Expectations (last 4.2%) data are then scheduled later in the day, providing further clues on the strength of the US consumer and the inflation outlook.
