U.S. Markets Struggled After Inflation Report Failed To Quell Rate Hike Worries

Barry Adams
10 Aug, 2023
New York City

Market averages on Wall Street struggled to advance after inflation weakened because of the base-effects. 

Market averages popped and Treasury yields held stable with a downward bias after the consumer price index accelerated in July, but indexes faced selling pressure after two hours of trading.  

Markets reacted positively to the report and investors hoped that the latest inflation data may provide one reason to pause rate hikes at the next meeting. 

The good news on the inflation front was also outweighed by the recent rise in crude oil prices, stoking fears of another bout of inflation at pump stations and at grocery stores. 

At least in the last month, it was the cost of housing that drove the 90% increase in inflation.

Natural gas prices turned volatile after traders forecasted prices to go higher despite the recent surge on the fears of long strike at LNG terminals in Australia, longer-than-usual maintenance in Norway and slowing flows in the LNG terminals in the U.S. 

Market indexes are facing headwinds after rallying since last October and big tech stocks are in consolidation phase, keeping the downward bias on averages. 

 

CPI Accelerated In July Driven by Housing Costs, Core Falls On Base-Effects  

The consumer price index rose 3.2% in July and core inflation edged lower to 4.7%, far above the Fed's target rate of 2%. 

On a monthly basis, seasonally adjusted inflation rose 0.2%, the U.S. Bureau of Labor Statistics reported Thursday. 

The inflation index, which understates price increases felt by most urban families, has gone up and down largely following the trajectory of crude oil prices. 

Consumer inflation peaked at 9.1% in August and ever since it has been on the slide reflecting weakness in the crude oil prices, which declined at a slower pace of 12.5% in July after falling at 16.7% in June.  

Shelter cost jumped 0.4% on a monthly basis and rose 7.7% from a year ago, and housing cost weighs only one third in the CPI, the BLS noted in the report today.

On the employment front, real wages rose 0.3% from the previous month or increased 1.1% from a year ago, slower than overall inflation, the BLS reported in a separate report today. 

While inflation is moving in the right direction and it has eased considerably from the 40-year high of 9.1% in June 2022, inflation is still above the Fed's target rate of 2%. 

Moreover, much of the decline in inflation is because of base-effects and not Fed's doing, because rates are still not restrictive enough to slow economic growth. 

Initial claims for jobless benefits rose 21,000 from the previous week to 248,000 in the week ending on August 5, the U.S. Department of Labor reported Thursday. 

 

U.S. Indexes & Yields 

The S&P 500 index traded up 0.3% to 4,480.87 and the Nasdaq Composite gained 0.3% to 13,767.13. 

The yield on 2-year Treasury notes increased to 4.78%, 10-year Treasury notes inched lower to 4.02% and 30-year Treasury bonds edged down to 4.30%. 

Crude oil decreased $1.47 to $82.92 a barrel and natural gas prices decreased 19 cents to $2.76 a thermal unit. 

 

U.S. Stock Movers 

Six Flags Entertainment Corp decreased 1.9% to $22.45 after the amusement park operator reported  weaker-than-expected quarterly results. 

The company reported revenue of $444 million and earnings of 25 cents a share and the company blamed the decline in earnings to higher reserves for self insurance. 

Walt Disney Co increased $90.03 after the media and theme park operator reported a rare quarterly loss and the company said it will crack down on password sharing and lift prices on its free streaming services. 

Alibaba Group Holding Ltd jumped 4.7% to $100.21 after the China-based e-commerce company reported better-than-expected earnings and revenue surged 14%, the best in two years. 

Tapestry Inc dropped 12.5% to $36 after the apparel company agreed to acquire Capri Holdings, the parent of Versace, for $8.5 billion or $57 a share in cash. 

Capri Holdings jumped 56.5% to $54.20. 

AppLovin Corp jumped 26.2% to $37.15 after the game developer reported better-than-expected second quarter earnings of 22 cents and forecasted stronger-than-expected revenue between $780 million and $800 million.

 

European Markets Rebounded, Natural Gas Surge Stokes Inflation Worries 

European markets traded higher and investors reacted to regional corporate earnings.

Market averages in London, Paris and Frankfurt rebounded and banks continued to recover following losses two days ago after the Italian finance minister announced a cap on windfall tax.

Bond yields were stable ahead of the release of the U.S. inflation report later today.

Traders are looking for overall inflation to edge slightly higher but it is the core inflation that will drive the market sentiment.

Overall inflation has declined sharply from close to 9% high in June 2022 and has steadily fallen to below 4% reflecting the weakness in crude oil prices.

But core inflation has stayed near 4%, significantly higher than the Fed's preferred level of 2%, making some traders worried that the central bank may abandon its long standing target.

Crude oil prices traded near a 9-month high on the tighter supply conditions and natural gas prices soared on the worries that global supplies worries.  

 

Europe Indexes & Yields

The DAX index increased 0.9% to 15,996.52, the CAC-40 index rose 1.5% to 7,433.82 and the FTSE 100 index added 0.4% to 7,618.60.  

The yield on 10-year German bonds increased to 2.49%, French bonds traded higher to 3.06%, the UK gilts edged up to 4.37% and Italian bonds increased to 4.17%.

The euro edged lower to $1.102, the British pound to $1.272 and the U.S. dollar fetched 82.62 Swiss cents.

Natural gas prices edged lower from a two-moth high after LNG flows to terminals in the U.S. eased and traders are forecasting supplies from the U.S. are likely to be diverted to Asia in the next three months because of higher prices.

A potential strike at four LNG locations in Australia could disrupt natural supplies, that could force many European companies and government to buy natural gas in the spot market. 

Despite the recent surge in prices, natural gas storage across the European Union is near a record 87% level and regulators are aiming for 90% level before the end of November to meet demand next winter.

Germany, Italy and Spain are at or near levels set by the EU authorities and France is expected to catch up in the next few weeks.

Brent crude decreased $0.11 to $87.40 a barrel and the Dutch TTF natural gas decreased €0.48 to €39.44 per MWh.

 

Europe Stock Movers

Zurich Insurance Group AG increased 1.8% to CHF 427.90 after the Swiss company reported strong results in the first-half.

Allianz SE jumped 2.9% to €220.75 after the German company reported better-than-expected profit increase in the second quarter.

Novo Nordisk AS decreased 1.9% to DKK 1,239.0 after the maker of weight loss blockbuster drug Wegovy  extended supply restrictions in some areas for some doses.

Siemens AG declined5.4% to €138.18 after the German engineering group reported weaker-than-expected profit in the latest quarter.

Thyssenkrupp AG increased4.5% to €6.99 after the company estimated 2023 operating earnings are likely to be towards the upper end of the range.

Hapag Lloyd AG declined 3.4% to €186.10 after the container shipping company said profit in the first-half fell 67% from a year ago.

Antofagasta Plc jumped 1.5% to 1,631.0 pence after the company reported better-than-expected sales and earnings growth and increased its shareholder payout.

Luxury stocks in Paris advanced and Hermes and LVMH jumped between 1% and 2.5% after China permitted group tours to South Korea for the first time since 2017.

Entain Plc  rose 1% to 1,371.0 pence after the gambling company swung to a pre-tax loss of £502.5 million from a profit of £28.1 million a year ago.

Persimmon Plc increased 3.4% to 1,160.0 pence after the UK-based home builder forecasted annual profit in line with market expectations.