Mild Inflation and Robust Profits Drive Stock Market Surge

US inflation news has been favorable this week, with data revealing a slowdown in both headline inflation at 3% and core inflation at 4.8%, both below expectations. Producer price inflation also came in lower than anticipated. These positive figures may be the last before they potentially shift into negative territory in the coming months.

In response, the US 2-year yield fell to 4.60%, and the 10-year yield retreated below 3.80%. The US dollar index slipped below 100 for the first time since April 2022. Amid slowing inflation, the Federal Reserve is not expected to adopt a more aggressive stance. The likelihood of another 25 basis point hike at the Fed’s July meeting remains above 90%, but the chances of further rate hikes have become less clear.

The softening of Fed expectations has cheered equity markets. The S&P 500 extended gains and closed above the 4500 mark for the first time since April 2022. The Nasdaq 100 rallied, gaining 1.73%. Amazon’s stock reached a 10-month high after reporting record sales during its Prime Day.

Conversely, crude oil prices are rallying around $77 per barrel due to supply shortages. However, the International Energy Agency predicts that global oil demand will not rise as much as previously forecasted due to weakened economies in developed nations. This change in forecast could attract bears back to the market.

Despite concerns about the resilience of the US job market, the stock market rally poses less of a worry because the Fed recently introduced a financial conditions index. This index, which considers factors such as bond yields, mortgage rates, the stock market, and the dollar’s value, indicates that financial conditions in the US have become increasingly unfavorable this year.

Investors remain focused on earnings rather than overall financial conditions. Positive developments on the earnings front include Delta Airlines’ surge to its highest level since April 2021 after reporting record revenue and profit in Q2. Similarly, PepsiCo rallied by almost 2.40% after announcing a robust quarter.

Today, major US banks will report their earnings. Despite benefiting from significant deposit inflows following the collapse of Silicon Valley Bank, their net interest income is expected to decline. Therefore, the reported numbers could be relatively soft, but if expectations are exceeded, stock prices will not be negatively affected.