[New York Stock Market] Nasdaq Jumps 2.89% as CPI Increase Slows... S&P 500 Hits 3-Month High

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] Major indices of the U.S. New York stock market rallied on the 10th (local time) as the July Consumer Price Index (CPI) inflation rate released was slower than expected. This was due to the growing view that inflation has peaked, leading to a recovery in risk asset preference sentiment. There are also increasing forecasts that the Federal Reserve's (Fed) pace of interest rate hikes may slow down somewhat.

On that day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 33,309.51, up 535.10 points (1.63%) from the previous session. The S&P 500, centered on large-cap stocks, rose 87.77 points (2.13%) to 4,210.24, marking its highest level since early May. The tech-heavy Nasdaq index closed at 12,854.81, up 360.88 points (2.89%).

Among individual stocks, technology stocks showed notable strength. Meta Platforms, the parent company of Facebook, closed up 5.82% from the previous session. Microsoft rose 2.43%. Tesla increased 3.89% despite news that CEO Elon Musk sold $6.9 billion worth of shares. Semiconductor stocks that had recently declined due to earnings outlook warnings, such as Nvidia (+5.92%) and ADM (+3.67%), also rebounded that day. Salesforce jumped 3.50% to close the session.

Financial stocks also surged. JPMorgan Chase rose 2.61%. Citigroup (+2.11%), Goldman Sachs (+3.35%), and Wells Fargo (+2.14%) all rallied together. Energy stocks, which had shown a decline early in the session, turned upward supported by rising oil prices. Marathon Oil (+1.73%), ExxonMobil (+0.95%), Occidental Petroleum (+0.72%), and Devon Energy (+1.71%) all rose in unison. Meanwhile, Wendy's, which reported below-expectation earnings, closed down 1.75%.

Investors closely watched the CPI released that morning to gauge inflation trends and the Fed's future pace of interest rate hikes. The U.S. Department of Labor announced that the July CPI rose 8.5% year-over-year. This was a significant slowdown from the previous month’s 9.1%, the largest increase since November 1981. It also fell short of experts’ expectations of 8.7%. The month-over-month inflation rate was 0%, also below market forecasts. This inflation slowdown is analyzed to be influenced by a sharp drop in energy prices such as gasoline.

Following the CPI release, the dollar and Treasury yields declined. In the New York bond market that day, the yield on the 10-year U.S. Treasury fell to around 2.79%. The 2-year yield, sensitive to monetary policy, slightly dropped to about 3.19%. The inversion of short- and long-term yields, often interpreted as a recession signal, continued. The dollar index, which shows the value of the dollar against six major currencies, fell more than 1% to around 105.

The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), known as Wall Street’s “fear gauge,” dropped more than 9% from the previous session, hovering around 19.

With the easing inflation indicators, the market increasingly expects the Fed to opt for a 0.5 percentage point rate hike instead of 0.75 percentage points at the September meeting. Fed officials have stated that they would slow the pace if clear signs of inflation easing appear.

According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds futures market had priced in over a 68% chance of a giant step (0.75 percentage point hike) in September until the previous day, but this has dropped to 41.5%. Conversely, the probability of a big step (0.5 percentage point hike) rose from 32% the previous day to 58.5% on this day. Nancy Davis, founder of Quadratic Capital Management, said, "The slowdown in July CPI will provide considerable relief to the Fed," adding, "If it is confirmed that inflation continues to ease, they may begin to slow the pace of monetary tightening."

President Joe Biden also gave a positive assessment, saying, "We are seeing signs that inflation may ease." He emphasized, "People are still suffering," but "last month's inflation was zero." These figures are considered good news for President Biden and the Democratic Party, who have struggled with inflation ahead of the November midterm elections.

However, some argue that the data released that day is insufficient to be seen as a definitive sign that inflation has peaked. This is the context behind Cleveland Federal Reserve Bank President Loretta Mester’s warning that "declaring victory too early in the fight against inflation would be a mistake."

The New York Times (NYT) also reported that "declaring victory too early in the fight against inflation based on short-term CPI slowdown would be a mistake." Concerns were also raised that while energy prices have fallen, housing costs and rents remain high. Greg McBride, chief analyst at Bankrate.com, pointed out, "To reach a peak, we need to see broad and sustained declines," adding, "That is not yet the case. Price increases for essentials continue."

Following last week’s strong employment report and the recent inflation slowdown, the debate over a U.S. recession has somewhat eased. Aneta Malkowska, chief economist at Jefferies, stated, "For now, we should put the recession talk to rest." However, she predicted that the U.S. could still enter a recession in 2023.

International oil prices rose. On the New York Mercantile Exchange, September West Texas Intermediate (WTI) crude oil closed at $91.93 per barrel, up $1.43 (1.58%) from the previous session.