S&P 500 rallies after turbulent week in hopes of good inflation data

The S&P 500 index led stocks higher following turbulent trading last week. This week’s focus is expected to largely be on consumer and producer price inflation data released on Thursday and Friday, expected to be good, along with lingering company earnings reports. Traders continue to monitor the escalating Russian-Ukraine war, which took another step toward escalation over the weekend, as fruitless peace talks took place in Saudi Arabia. Traders are also anticipating a round of stimulus in China in the near-term to boost its economy.

Bottom-line: Risk-on.

TODAY’S MAJOR NEWS

US inflation data forecast to continue slowing

US Consumer Price (CPI) inflation is the market’s favorite inflation indicator, rather than the Fed’s, but the report can dictate market volatility. Headline and core CPI are expected to move down in July, on an annual basis, to 3.1% (4.0% prior month) and 5.0% (5.3% prior month).  Headline and core Producer Price (PPI) inflation are expected to move down in July, on an annual basis, to 0.4% (0.9% prior month) and 2.6% (2.8% prior month). 

The price gauge has seen a fairly steady deflation from its peak which has reinforced the forecast for the Fed coming to the end of its regime of hikes perhaps with last month’s FOMC meeting. Now, with a consensus building of a hold through the end of 2023, how much impact will the CPI release have? This should be a good week with forecasts are correct. A surprise and significant increase would likely carry the greatest market impact, but even that may fail to trigger lasting dollar moves.

We would remind readers to consider the view of StoneX market strategist Vincent Deluard, that the US could experience a second wave of inflation, perhaps starting as soon as the next Consumer Price Index (CPI) data. “A second wave of inflation could dash US rate cut hopes”, August 1, 2023: A second wave of inflation could dash US rate cut hopes

China’s economy needs a boost

Local analysts believe August will see China stimulate its economy, providing a macro focus for traders with the next US Fed meeting still 44 days away. There’s rising speculation within China that its central bank will cut the reserve requirement ratio for commercial banks, or possibly cut interest rates shortly. August and September are typically the peak months for issuing local government bonds, and a lower rate would be expected to stimulate demand for property, which accounts for more than 30% of Chinese GDP. China’s State Taxation Administration rolled out 28 measures to support the private sector over the weekend, largely extending the duration of tax exemption or tax cuts for small and medium-sized enterprise and individual businesses. Beneficial tax policies were also introduced for small and medium sized business R&D projects.

Ukraine escalation continues to threaten commodity exports

The Russia-Ukraine war continued to escalate over the weekend, increasing the risks that we could see an eventual slowdown in the movement of commodities out of Russian ports, but there is little evidence that such has happened yet. Ukraine hit an oil tanker near the Kerch bridge over the weekend – close enough to close the bridge for a few hours. It was a sanctioned ship reportedly in Ukraine waters, which Ukraine claimed was delivering fuel to Russian forces in the war. But, it was probably being used to transport fuel to Russian forces in Syria. Nonetheless, it was a Russian ship hit in the Kerch straight, further illustrating Ukraine’s expanded capacity to strike beyond its borders. Another Ukraine drone was shot down on its way to Moscow, following a couple of successful strikes on a government building in Moscow last week. This also comes on the heels of a Ukraine water-drone strike on a Russian naval ship in the port of Novo last week. Grain and oil currently are still flowing out of Russian ports through the Kerch Strait, although apparently more during the day than at night for security reasons. The market is aware of the increasing risks that we could see Russian shipments curtailed, but thus far it must also trade the reality that ships continue to carry low-priced commodities through the Strait.

TODAY’S MAJOR MARKETS

Equity markets

• Equity markets recovered after pre-open jitters, with the S&P 500 and Nasdaq up 0.7% and 0.3%, respectively, while the broadly based Russell 2000 was unchanged at lunch
• Global markets were flat, with the FTSE 100, Dax and Nikkei 225 all pretty much unchanged
• The VIX, Wall Street’s fear index, initially rose to 17.4, its highest level in almost 3 months, but was 16.1 at time of writing

Currencies and Bonds

• The dollar index lost early momentum and was unchanged at 102.0 at time of writing
• Sterling and the Yen fell 0.3% and 0.5% against the dollar, respectively, while the Euro was unchanged
• Bonds fell again, with yields on 2- and 10-year Treasuries rising to 4.75% and 4.08% respectively

Commodities

• Crude oil prices fell 0.8% to $82.2 per barrel on profit-taking after a recent strong run. Prices found support from tightening global supplies, a resilient economy and from increased Black Sea risks following a weekend attack on a Russian military tanker in the Kerch Strait
• Gold and silver prices were down by 0.3% and 2.0%, respectively, to $1,970 per ounce and $23.4 per ounce
• Ukraine export risks by sea supported Chicago wheat prices, while soybean prices tumbled through chart support on weekend rains, with corn caught between the two

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com