US equities climbed on Wednesday while Treasury yields fell after US inflation data was softer-than-expected.
United States
For the 12 months to June, headline prices rose 3% down from 4% previously and modestly below estimates of 3.1%. Importantly, core inflation which has been a key focus for investors and policymakers having remained stubbornly more persistent declined to 4.8%, below expectations of 5%. Over the month, headline and core prices both rose 0.2%, putting inflation near the Federal Reserve’s target on an annualised basis. Shelter inflation continues to make up a sizeable component of current price pressures, with the Bureau of Labor Statistics noting this component accounted for over 70% of the increase. Shelter prices are a significantly lagging indicator, which adds to an optimistic outlook in the fight against inflation, with real-time measures of shelter pointing to easing pressures to come in the coming months. A super core measure of inflation, which excludes energy and shelter rose 4% over the year, the smallest increase since late 2021.
US Inflation (YoY %)
The S&P 500 closed -0.74% higher on Wednesday, with 81% of the index closing higher. The Dow Jones rose 0.25%, the Nasdaq Composite added 1.15% while the Russell 2000 Index firmed 1.05% with the VIX slumping -8.76% to 13.54. The reaction in Treasury yields was swift, the policy-sensitive 2-year rate fell -12.9 basis points to 4.747% with the 10 and 30-yea rates also -11.2 and -6 basis points lower respectively weighing on the US dollar index which fell -1.19%. Despite the softer print, traders still see the likelihood of a further 0.25% rate increase at the July 26th FOMC meeting, which is finally expected to represent peak interest rates with as much as -1.16% in cuts priced in for 2024.
US 2 Year Yield vs S&P500 E-mini Futures
Europe
European equities rallied by the most in five weeks, with sentiment lifted by the weaker US inflation data. The Eurozone Stoxx 600 rose 1.51% along with the DAX 1.47%, CAC 1.57% and FTSE100 1.83%. Government bond yields across the region also declined on expectations that the most important central bank globally will shortly have reached peak interest rates, despite the need for further rate hikes by the ECB and BoE.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
Australia
The ASX is expected to open higher this morning, with futures up by 0.87% to 7158. The Index gained 0.38% to close at 7135, with eight out of the eleven sectors closing in the green. Energy stocks soared following higher oil prices to help the sector gain 1.96%, namely Woodside Energy (2.65%), Beach Energy (1.74%) Paladin (1.33%) Whitehaven Coal (1.06%), Santos (1.20%). In materials, Fortescue Metals firmed 2.49%, BHP was up 1.71%, and RIO added 1.64%, with the sector closing 1.0% higher. In individual stocks, Megaport was the star performer jumping 5.45% following a profit upgrade on Tuesday, despite the technology sector becoming the worst-performing sector of the index. Reserve Bank governor Philip Lowe revealed at an event that the central bank was “deadly serious” about controlling inflation, stating the outlook had worsened. Meanwhile, the Reserve Bank of New Zealand announced keeping interest rates constant at 5.5% at Wednesday’s July policy meeting. The yield on the 10-Year government bond fell by 5.6 basis points to 4.12%, while the local currency rose by 1.6% against the greenback to 0.6686.
Commodities
In commodities, the price of oil soared with the weaker US inflation data more than offsetting a larger-than-expected build in crude oil inventories. For the week ending July 7th, crude stockpiles rose 5.946m barrels compared to 483k expected. WTI and Brent crude were up by 1.23% and 1.01% to $75.75 and $80.20 respectively. In precious metals, spot gold prices were up by 1.30% to $1,957, while spot silver soared 4.33% to $24.12 benefiting from a drop in real yields and weaker USD. Copper advanced 2.36% to $384, and the price of SGX Iron Ore jumped 3% to $108.93. Meanwhile, the price of Bitcoin declined by 0.6% to $30,357.
Economic Calendar
13th July 2023
Australian Consumer Inflation Expectations (MoM Jul) 11:00
UK GDP (YoY May) 16:00
ECB Monetary Policy Meeting Accounts 21:30
US PPI (MoM June) 22:30
US Jobless Claims Report (July 8th) 22:30
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via [email protected] or by phoning +612 8302 3632.
