Optimism prevails in the markets ahead of the release of US CPI data
Risk assets were able to extend or maintain their gains during today's session as investors await the latest inflation report from the US at 12:30 GMT. After the annual CPI rate fell at a higher-than-expected rate to 8.5% over the past month, expectations are growing that inflation may slow at a higher rate in August to 8.1%.
However, while this decline may represent a turning point in the inflation scenario, the Fed's fight against inflation is by no means over. Now that gasoline and other energy prices have fallen, it seems that things are becoming clearer about the impact of the second round of monetary tightening on the economy - which the Federal Reserve will be watching very carefully.
Investors seem to be ignoring expectations for core CPI, which is expected to have risen slightly in August, after having been flat after reaching its highest levels in March. This may shift the focus of markets to the non-energy categories of the CPI, especially used cars and housing costs, which were a major cause of higher core inflation.
Thus, a sudden rise in one of these major categories on an annual basis could negatively affect the optimism of the markets, which suggests that the Federal Reserve will move to slow the pace of tightening after the September meeting, even if the upcoming data cannot prevent policy makers from raising rates by another 75 basis points. next week.
Stocks continue to rise amid declining inflation expectations
Wall Street shares closed yesterday's session higher for the fourth consecutive day - which is considered the best performance of stocks since June - at a time when investors' confidence is increasing that the inflation wave may ease. Despite the risks of a sudden rise in CPI numbers over the coming months, some traders are weighing the fact that inflation expectations are about to decline as well.
According to a New York Federal Reserve survey, consumers' expectations of inflation over the next year have fallen to their lowest level in 10 months in August, while the two-year break-even inflation rate is close to its lowest since February 2021. The next major data forecasts on inflation will also be released. From a consumer opinion poll released by the University of Michigan on Friday.
However, if Treasury yields begin to decline again, affected by speculation that the inflation problem is starting to subside, the Federal Reserve will likely try to counter this speculation with more hawkish statements, which poses a risk to the markets. The Federal Reserve has become completely dependent on the performance of economic data in making its decisions for the year, so it will not back down from its hawkish stance until it confirms that inflation is heading towards the 2% target.
It seems that this situation was not a major concern for the markets yesterday as the S&P 500 Index rose more than 1% to close above the 4100 level for the first time since late August. The Nasdaq Composite Index also rose slightly after receiving support from Apple stock (up 3.9%), which rose on reports that the demand for the new iPhone 14 Pro Max version is higher than the demand for the previous generation.
US futures recorded further gains today, and European and Asian stocks also rose, supported by promises of the Chinese authorities to adopt more stimulus for the economy to offset the losses caused by the new Covid-19 virus restrictions announced over the weekend.
The dollar continues to decline, but the euro and the pound sterling rise
The improvement in risk appetite appears to have taken a toll on the strong US dollar, although the safe-haven Japanese yen was able to recover some of its losses against the other major currencies, supported by the dollar's decline against it.
The Australian and New Zealand dollars will struggle to hold on to their recent strong gains, but the streak of gains in the Euro and the British Pound is far from over.
The Euro rose above the $1.0150 level, while the Sterling Pound rose above the $1.17 level. Attention is now turning in Europe towards the measures that European governments will adopt to solve the energy crisis.
Despite growing uncertainty about whether these emergency measures will succeed - the EU is still trying to reach a final agreement, and the UK's plan appears to raise the risk of higher taxes in the future - it is essential that they be adopted to ease the suffering of consumers and businesses. Although the possibility of a recession in the Eurozone and the UK is growing, taking such emergency measures supports both currencies - although the situation was different only a few weeks ago - so the euro and the British pound are witnessing this rally.
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