Wall Street confirms the rebounding trend since mid-June after the US CPI data came out lighter-than-expected, which printed 8.5% year on year, lower than the estimate of 8.7%, down from 9.1% the prior month. The core CPI dropped to 5.9% vs a forecast of 6.1%. Cooler inflation provides a relief rally in the US stocks by helping waken expectation for the Fed to raise rates by another 75 basis points in September. According to the CEM Fedwatch tool, the probability for the Fed to raise 50 bps is at 58.5% vs 41.5% for 75 bps, which reversed the odds from yesterday before the CPI data was released.
Higher open is expected in Asian markets
Most Asian major indices are to open higher as indicated in the futures markets following the Wall Street rally. However, China’s elevated inflation data sent jitters to the Chinese stocks on Wednesday as the second-largest economy is still facing challenges around slowing growth in its credit sector, suggesting that the dynamic zero-covid policy keeps business confidence in caution. Today’s China’s new loan and M2 money supply data will provide more clues to the economic trajectory.
The S&P/ASX 200 futures are up 1%, pointing to a jump open in the ASX. The S&P/NZX 50 rose 0.63% in the first hour of trading. The local earnings season also offers optimism to both the exchanges, with the New Zealand renewable energy stocks outperforming since July. Meridian Energy shares jumped 1.4% to NZ$5.26 at the open, the highest since mid-May.
Cooling inflation sent US stocks higher
Risk-on sentiment led to the broad-based rally in Wall Street amid the cooler-than-expected July CPI data as odds for the Fed to scale back rate hikes from September have been strengthened. The cooling inflation data suggests that Fed's "front load" rate-hike policy might have peaked in July, hence, investors have got a respite from recession fears.
The Dow Jones Industrial Average was up 1.63%, S&P 500 rose 2.13%, and Nasdaq jumped 2.89%. The S&P 500 is now only 12% down from the high in January after falling into a bear market in early June. Nasdaq outperformed the other two benchmark indices and is now off the bear territory, with 17.83% down year to date.
All the 11 sectors in S&P 500 finished higher, with growth sectors, industrials, and materials all up close to 3%. All the meg-cap tech shares were higher. Meta Platforms rose 5.8%, and Amazon was up 3.6%. Tesla shares advanced 3.9% though CEO Elon Musk sold another $6.9 billion in stocks.
Disney shares jumped 5.8% in after-hours trading due to a beat on earnings estimates. Its live streaming business, Disney + added 152.1 million subscribers, topping analysts’ forecast of 147. 76 million. Earnings per share came at $1.09 per share vs. 96 cents of estimate and revenue is at $21.5 billion vs. $20.96 billion expected.
The major companies’ performance overnight (05 August 2022)
US dollar weakens as bond yields lower
While bets for a “peak Fed” is growing, the other major central banks are on pace for more aggressive rate hikes, which caused the US dollar to fall against the other major currencies due to rotation in monetary policy cycles.
The Eurodollar up almost 1 cent against the greenback to just above 1.03, the highest since 5 July. USD/JPY sank more than 1% to just under 133, approaching the next support level near 131. And GBP/USD rose1.2% to 1.2217.
Commodity currencies surged against the US dollar, with the New Zealand dollar strengthening the most, up 1.8%, to 0.64 this morning. AUD/USD spiked to 0.7080, breaking out the key resistance at 0.7050. Both the New Zealand dollar and Australian dollar reached the highest since 10 June. The Canadian dollar has also firmed against the USD to 1.2776.
Commodity takes a ride as recession fears fade, dollar drops
Crude oil prices bounced off the day lows and finished higher as the relief rally on Wall Street faded recession fears. A slowdown in rate hikes may provide stimulation to the economy and lift both consumer and business confidence. The WTI futures were up 1.6% to US$91.93 per barrel. And Brent rose 0.83% to US$97.40 per barrel.
Gold, however, retreated from the day high, down 0.31%, to $1,808 per ounce as the US bond yields swung through the session. The recent negative correlation between the gold price and bond yields suggests a further drop in the bond yields would lift the precious metals higher if Fed reached a policy pivot.
Bond markets may not be settled just yet
Despite a slight drop in the US 10-year government bond yields, the short-dated bond yield stayed flat overnight. The yield on the 2-year note stays at 3.22%, while the yield of the 10-year note is at 2. 785%. The economic outlook is still on edge, with the two benchmark bond yields remaining inverted since early July.
Ethereum outperforms bitcoin in risk-on sentiment
The crypto markets also jumped amid the broad risk assets rally. Bitcoin was up 2.93%, to US$23,864, and Ethereum rose 8.56%, to US$1,852.89. Ethereum has been outperforming bitcoin as riskier coins take the better rebounding tailwind.
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