Wall Street winning streak continues as US inflation continues to fall way past UK

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The tailwind from rising interest rates continued to benefit US lenders.
Although interest income continued increasing, banks were starting to see higher default rates.

Wall Street’s winning streak barrelled into a fourth day following the latest signal that inflation is easing its chokehold on the economy.

The S&P 500 rose 0.8 per cent  on Thursday for its highest close since April 2022.

The Dow Jones Industrial Average rose 0.1 per cent , and the Nasdaq composite rallied 1.6 per cent  as big tech stocks led the way.

Treasury yields tumbled further in the bond market after a report showed inflation at the wholesale level cooled by more in June than expected. That has traders increasingly betting the Federal Reserve may end its blistering run of hikes to interest rates very soon.

Prices paid by producers were just 0.1 per cent  higher during the month than a year earlier. That is down from 11.2 per cent  inflation last summer.

Inflation in the US slumped to its lowest level in more than two years and is now far below the UK’s rate. American inflation fell to three per cent in June on an annual basis, down from four per cent in the previous month, according to the US Labour Department this week.

This comes as British inflation peaked at just over 11.1 per cent last October and has been more resistant to downward pressures. It is stuck at 8.7 per cent, while services and core inflation is running at more than seven per cent. UK headline inflation is the highest in the G7.

High inflation has been the main reason investors have been fearing a possible recession, because of how high the Federal Reserve has cranked interest rates to get prices under control.

High rates undercut inflation by bluntly slowing the entire economy and hurting prices for investments. They can also cause unanticipated parts of the economy to break.

Traders remain nearly convinced the Fed will raise the federal funds rate at its next meeting in two weeks to its highest level since 2001. But this week’s inflation data has also pushed traders to build bets for that to be the final rate increase of this cycle.

A report on Wednesday showed that prices consumers paid in June were 3 per cent  higher than a year earlier, down from inflation of more than 9 per cent  last summer. It has been a “cool summer breeze,” as Deutsche Bank economists describe it.

Treasury yields fell further in the bond market as traders pared bets for Fed rate hikes later this year.

The 10-year Treasury yield fell to 3.75 per cent  from 3.86 per cent  late on Wednesday and from 3.98 per cent  late on Tuesday. It helps set rates for mortgages and other important loans.

The two-year Treasury yield fell to 4.60 per cent  from 4.75 per cent  late on Wednesday and from 4.89 per cent  late on Tuesday. It moves more on expectations for action by the Fed.

Yields fell further in the afternoon after James Bullard said he will step down as president of the St Louis Federal Reserve Bank to become the inaugural dean at Purdue University’s business school next month.

He was one of the loudest voices on the Fed pushing for higher rates to combat inflation.

Easier interest rates help all kinds of investments. But many investors see big technology and other high-growth stocks among the biggest beneficiaries.

That had Amazon, Alphabet and Nvidia among the strongest forces pushing up the S&P 500. Amazon gained 2.7 per cent  after it said the first day of its annual Prime Day event on Tuesday was the biggest sales day in its history.

Alphabet rose 4.5 per cent  after Google said it is rolling out Bard, its chatbot powered by artificial intelligence, to more countries around the world and launching new features for it.

Nvidia, which has been at the centre of Wall Street’s frenzy around AI, rose 4.2 per cent .

PepsiCo added 2.3 per cent  after it beat analysts’ profit expectations for the spring. It saw lower demand for drinks and snacks, but higher prices helped its earnings. It also raised its forecasts for results for the full year.

The earnings reporting season is just getting under way, and JPMorgan Chase will lead a barrage of banks on Friday that will tell investors how much they made during the spring.

Expectations overall are dim, and analysts are forecasting the sharpest drop in earnings for S&P 500 companies since the pandemic was hitting the global economy in the spring of 2020.

A resilient job market has nevertheless been keeping the economy out of a recession. A report on Thursday showed fewer workers applied for unemployment benefits last week than expected. Too strong of a job market could also push the Federal Reserve to get more aggressive about interest rates and inflation.

While inflation is showing encouraging signals, Wall Street may be piling too quickly into a consensus that it will keep cooling enough for the Federal Reserve to ease up on rates and prevent a recession, warned Chun Wang, senior research analyst and co-portfolio manager at Leuthold.

In a report, he said the market may be underestimating the risk that inflation stays stuck at 3 per cent  to 4 per cent  in the next six to 12 months and that “the path forward for both inflation and the Fed policy is not a no-brainer at all. We get the sneaking suspicion that the current soft landing narrative will be seriously challenged before the first leaf falls from the tree”.

On the losing side of Wall Street Wednesday was Exxon Mobil. It fell 1.9 per cent  after saying it would buy Denbury, which owns carbon dioxide pipelines, for 4.9 billion dollars (£3.73 billion) in stock. Denbury fell 1.3 per cent .

In Asia, Hong Kong’s Hang Seng rose 2.6 per cent  and stocks in Shanghai gained 1.3 per cent , even as China reported a slump in trade in June. The Kospi rose 0.6 per cent  after the Bank of Korea left its policy interest rate unchanged, as expected, but noted that the risk of inflation was accelerating again.

Stocks in Europe were modestly higher.

Stan Choe, Associated Press – Press Association