US Inflation Data - Wednesday & Thursday
Markets were awaiting two pieces of inflation data this week; the US Consumer Price Index and the Producer Price Index. The CPI is the figure used to calculate the country’s official inflation rate. At the same time, the Producer Price Index looks at price alterations in the amount paid to US producers for goods and services. Investors turned to the inflation data to determine how the Fed will likely increase interest rates and if a pivot is possible in early 2024.
The monthly CPI read lower than expectations showing a price alteration of 0.2%. Economists had initially expected 0.3%, meaning the inflation rate declined more than expected. The official inflation rate decreased for the 12th consecutive month from 4% to 3%. The Fed’s target is 2%, but even a 3% inflation rate significantly improves from the 6.4% in January 2023. The core inflation rate, which does not include volatile goods such as food products, also declined from 5.3% to 4.8%.
The PPI and Core PPI read only 0.1%, lower than previous expectations. As a result, investors are quite confident that the Fed will only hike in July’s meeting and pause after that. Some economists are also advising the Federal Reverse is likely to decrease interest rates by March 2024. Currently, investors are pricing a 0.25% hike in 2023 and an expansionary policy in 2024. However, the Federal Reserve is not as dovish as economists and investors. The Federal Open Market Committee members still indicate two more hikes in 2023.
As a result of the new inflation data, the US Dollar Index has declined from 102.42 on Monday to 99.82 this morning. The NASDAQ has been the best-performing index and has risen by 3.50% since Monday.
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UK GDP and Employment Data - Tuesday and Thursday
The GBP saw mixed price movements throughout the week depending on the currency pairs in focus. The Pound declined against the Euro, Swiss Franc and Japanese Yen but experienced bullish price movement against the Dollar. The Pound was supported by the latest Gross Domestic Product released Thursday morning. The GDP figure read -0.1%, better than the -0.3% previously expected. Therefore the UK economy saw a weaker contraction than previously thought.
The UK salary index also read higher than expected, rising from 6.7% to 6.9%. As a result, the UK economy will likely continue struggling with inflation and require a hawkish central bank. As a result, the Pound may potentially find support from the monetary policy. However, investors should note that the best-performing currency of the week was the Swiss Franc which rose against all currencies. Analysts have advised the bullish price movement of the Franc is primarily associated with the market’s risk appetite.
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Earning Season Starts - Friday
Lastly, today marks the first day of Earnings Season, where large US-based companies will release their earnings reports for the past quarter. As a result, the US stock market may experience higher volatility and possibly new trends. Today, the market will await the following reports:
- JP Morgan - Expected - Before Market Open
- United Health Group - Before Market Open
- Citigroup - Before Market Open
- Wells Fargo - Expected EPS $1.15 - Before Market Open
- Blackrock - Before Market Open
The previous two earnings season proved to be a significant price driver for individual stocks and indices. However, inflation and interest rates will continue to play a vital role in how investors view equities. Nonetheless, the earnings will determine how much dividends stockholders will likely earn and whether consumer demand remains high while interest rates have risen.
United Health Group will release their quarterly earnings report before the market opens this afternoon. United Health Group is the most influential stock within the Dow Jones holding a weight of 8.66%. For this reason, Dow Jones may experience volatility levels above its traditional range.
The US stock market is also being supported by the weaker US Dollar and lower bond yields, making equities more attractive. However, a slight concern for investors is the recession risk and rise in the price of Oil and natural gas. The price of Crude Oil is now trading at its highest price since April 26th 2023. The price of Crude Oil has risen by 5% this week so far, which is expected to make inflation more challenging to bring down. Lastly, investors will monitor the economic data coming out of China early Monday morning. China will confirm their latest Gross Domestic Product and the Industrial Production figure for the past year. Higher-than-expected figures can again positively support the global stock market.
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