Investor Optimism Soars as US Inflation Data Spurs Market Gains

Global Stock Markets Rise as Investor Optimism Grows, Dollar Remains Low

Stock markets around the world continued to climb on Friday, while the dollar remained near its lowest level in 15 months. This surge in investor optimism comes in response to recent U.S. inflation data, which suggests that the Federal Reserve is nearing the end of its rate-hiking cycle.

The latest data showed that U.S. consumer prices have been growing at their slowest rate in over two years, and there has also been a decrease in U.S. producer inflation, which is now at its lowest point in nearly three years. Additionally, U.S. import prices dropped 0.2% last month, and consumer sentiment reached its highest level in almost two years.

This positive data has led to a more optimistic outlook on inflation, causing the MSCI World Equity index to reach its highest level this year. The index rose 0.1% on Friday, following a week of gains that have positioned it for its largest weekly increase since November 2022. This also marks its highest level since early 2022.

Wall Street has experienced a fifth consecutive day of gains, with top lenders like JPMorgan Chase and UnitedHealth Group leading the way in the second-quarter earnings season. The Dow Jones Industrial Average rose 0.45%, the S&P 500 gained 0.10%, and the Nasdaq Composite added 0.12%.

While European stock indexes remained largely unchanged, with the STOXX down 0.11% and London’s FTSE 100 down 0.08%, Germany’s DAX experienced a 0.2% decrease after recent gains.

Despite the overall positive sentiment, Michele Morganti, senior equity strategist at Generali Investments, advised caution. He expressed concern over the elevated price-to-earnings ratios compared to real rates and economic growth, particularly in the U.S. Morganti noted sticky core inflation, tightening credit conditions, and macro indicators pointing towards a downturn.

Government bond yields in the U.S. saw a slight rebound on Friday following significant declines earlier in the week. The yield on 10-year Treasury notes was up 5.7 basis points at 3.817%, while the two-year U.S. Treasury yield increased by 14 bps to 4.751%.

Money market traders still anticipate the Federal Reserve to raise rates by 25 bps on July 26, but the likelihood of another rate hike later in the year has decreased. Norman Villamin, chief group strategist at UBP, believes there will be a rate hike in July, but he is uncertain about the September meeting. He acknowledged the persistence of above-target inflation in the long term, making it difficult to return to a 2% inflation rate and establishing a lower limit for bond yields.

The dollar continues to hover near a 15-month low, marking its largest weekly decline since November. Meanwhile, oil prices remain relatively stable, with global benchmark Brent crude around $80 a barrel, supported by supply disruption in Libya and Nigeria. Gold, on the other hand, experienced a slight decline after five consecutive sessions of gains, as expectations of a pause in U.S. rate hikes have increased.

In summary, global stock markets have seen steady gains as investor optimism grows following positive U.S. inflation data. While caution is advised due to concerns over elevated price-to-earnings ratios and sticky core inflation, the overall sentiment remains positive. The dollar remains low, and government bond yields in the U.S. have rebounded slightly after earlier declines. Anticipation for a Fed rate hike in July is high, but there is uncertainty regarding a potential rate hike in September.