Wall Street Extends Climb: Cooler Inflation and Positive Earnings Drive Market Gains

Optimistic Outlook as Wall Street Continues to Rise Amid Inflation Data

In recent days, global stock markets have experienced a surge in gains, while the value of the dollar remains close to a 15-month low. This wave of investor optimism was sparked by favorable U.S. inflation data, leading many to believe that the U.S. Federal Reserve is approaching the conclusion of its rate-hiking cycle.

On Wednesday, data revealed that U.S. consumer prices had grown at the slowest pace in over two years. Following this, Thursday's report indicated the smallest increase in U.S. producer inflation in nearly three years. Additionally, the government reported on Friday that U.S. import prices had dropped by 0.2% last month, accompanied by a significant rise in U.S. consumer sentiment to its highest level in nearly two years.

MSCI World Equity Index Surges to New Highs

As investors anticipate a more moderate inflation outlook, the MSCI World Equity index (.MIWD00000PUS) has reached its peak for this year. On Friday, the index experienced a 0.1% increase, accumulating gains throughout the week and putting it on track for its most substantial weekly rise since November 2022 and its highest levels since early 2022.

Wall Street's Fifth Consecutive Rise Fueled by Strong Earnings

Wall Street continues its upward trajectory, with Friday marking the fifth consecutive day of gains. The second-quarter earnings season commenced on a positive note as some of the country's top financial institutions, including JPMorgan Chase (JPM.N) and insurer UnitedHealth Group (UNH.N), delivered robust performance reports.

The Dow Jones Industrial Average (.DJI) rose by 0.45% to reach 34,549.15, while the S&P 500 (.SPX) gained 0.10%, closing at 4,514.5. The Nasdaq Composite (.IXIC) also experienced growth, increasing by 0.12% to 14,155.78.

European Stock Indexes Show Minimal Change

In contrast, European stock indexes exhibited minimal change, with the STOXX (.STOXX) experiencing a slight decrease of 0.11%, and London's FTSE 100 dipping by 0.08% (.FTSE). Germany's DAX declined by 0.2%, retracing some of its recent gains (.GDAXI).

Expert Advises Cautious Approach Amidst Concerns

Michele Morganti, senior equity strategist at Generali Investments in Rome, advises caution given the current market conditions. He emphasizes that price-to-earnings ratios are "exuberant" compared to real rates and economic growth, especially in the United States. Morganti also highlights persistent sticky core inflation, tightening credit conditions, and macro indicators pointing downwards as factors contributing to the need for short-term caution in the equity market.

U.S. Bond Yields Experience Modest Recovery

After a period of sharp declines earlier in the week, U.S. government bond yields have slightly bounced back on Friday. The yield on 10-year Treasury notes increased by 5.7 basis points to 3.817%. The two-year U.S. Treasury yield, which typically aligns with interest rate expectations, rose by 14 basis points to 4.751%.

Euro Zone Government Bond Yields Remain Steady

Euro zone government bond yields displayed minimal fluctuations on Friday, holding onto their gains following a robust two-day rally triggered by subdued U.S. inflation figures. Money market traders still anticipate a 25 basis point rate hike by the Fed on July 26, although they have lowered the likelihood of another rate hike later this year.

Norman Villamin, chief group strategist at UBP, suggests that another Fed rate hike is probable in July, but the September meeting remains uncertain. He acknowledges that we are likely approaching the end of the rate hike cycle. However, Villamin points out that above-target inflation is expected to persist in the long term, making it challenging to achieve a return to the 2% inflation target.

Weaker Dollar Persists

The value of the dollar continues to hover near a 15-month low, marking its most significant weekly decline since November due to softening U.S. inflation data. Meanwhile, the euro remains steady at $1.1232, reaching its highest level in over 16 months.

Oil Markets Supported by U.S. Demand and Supply Disruption

In the oil markets, the global benchmark Brent crude maintains a price around $80 per barrel on Friday. Bullish sentiment regarding U.S. demand has been bolstered by supply disruptions in Libya and Nigeria. Brent crude closed at $79.87, experiencing a decline of 1.83% on the day, while U.S. crude fell by 1.91% to $75.42 per barrel.

Gold Prices Experience a Small Decline

Following five consecutive sessions of gains, gold prices dipped slightly on Friday. Growing expectations of a pause in U.S. rate hikes have positioned bullion for its most substantial weekly gain since April. Spot gold declined to $1,960.24 per ounce.

Summary

With the release of favorable inflation data and positive earnings reports, global stock markets have seen significant gains. The MSCI World Equity index reached new highs, while Wall Street extended its winning streak. However, caution is advised by experts due to exuberant price-to-earnings ratios, persistent core inflation, and macro indicators signaling a potential slowdown. The dollar continues to weaken, and oil markets benefit from disrupted supply and optimistic U.S. demand. Gold prices experienced a slight decline but remain influenced by expectations regarding U.S. rate hikes. These recent developments are shaping the global financial landscape and have captured the attention of investors worldwide.