Wall Street Traders Drive Stocks Higher Before CPI: Markets Wrap

(Bloomberg) — The stock market finished higher before a report that’s expected to show a slowdown in inflation, which will help shape the outlook for the Federal Reserve’s next steps.

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In the run-up to the consumer price index, the S&P 500 extended its advance beyond the 4,400 mark while the Dow Jones Industrial Average added almost 1%. Energy producers led gains as West Texas Intermediate oil topped its key 100-day moving average. Activision Blizzard Inc. surged 10% as Microsoft Corp. won a US court’s OK to proceed with its $69 billion takeover deal.

A survey conducted by 22V Research shows that 65% of respondents believe the core CPI — which excludes volatile food and energy prices — will be lower than consensus. In addition, 54% of the investors polled expect the report to be “risk-on.”

“If economic data keeps tilting towards a soft landing, the markets are increasingly likely to price in that outcome, with investors reallocating to risk assets,” said Jason Draho, head of asset allocation Americas at UBS Global Wealth Management. A June CPI that’s in-line with expectations would be another step in that direction, he added.

Forecasters surveyed by Bloomberg expect the year-over-year rate of increase in core inflation moderating to 5%, according to the median estimate. But the slowdown will possibly not be enough to prevent additional policy tightening, with Fed officials widely expected to resume interest-rate increases later this month.

“A quarter-point hike on July 26 is a forgone conclusion at this point, and Wednesday’s CPI release will be more relevant to the September/November debate,” said Ian Lyngen at BMO Capital Markets.

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Inflation Peaks

After surging by a four-decade high in June 2022, CPI has pulled back steadily in the face of the Fed’s monetary policy onslaught. That slowdown has given support to the stock-market’s surge this year, and bulls have strong precedent for their enthusiasm.

Since the 1950s, inflation peaks have almost always been followed by double-digit equity gains, according to data compiled by the Leuthold Group. The S&P 500 has gained more than 20% since it bottomed out in October, placing it up about 15% since the peak CPI data was released last year.

Following the inflation data, traders will shift gears to the second-quarter earnings season, with JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. reporting their numbers Friday.

In 2023, gains in the S&P 500 have been more concentrated among its largest stocks than in any six-month period since the turn of the millennium, resulting in expensive valuations for the index’s biggest names. That means the earnings season, along with policy cues are poised to “make or break the case” for those premiums to hold, said Gina Martin Adams, chief equity strategist at Bloomberg Intelligence.

Strong equity performance this year has created a dilemma for investors who are underweight equities, according to UBS’s Draho.

“They can stay cautiously positioned, which can be painful absent a recession,” Draho noted. “The alternative is to increase equity allocations, but at the risk of getting whipsawed if a recession has only been delayed not averted.”

Elsewhere, oil rose amid indications that Russian crude production is dropping, signaling the market’s supply glut may be coming to an end. Adding to bullish sentiment is news that China will take more steps to revive its economy with additional stimulus.

Key events this week:

• Canada rate decision, Wednesday

• Bank of England Governor Andrew Bailey speaks, Wednesday

• US CPI, Wednesday

• Federal Reserve issues Beige Book, Wednesday

• Fed speakers include Neel Kashkari, Loretta Mester, Raphael Bostic, Wednesday

• China trade, Thursday

• Eurozone industrial production, Thursday

• US initial jobless claims, PPI, Thursday

• US University of Michigan consumer sentiment, Friday

• US banks kick off earnings, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.7% as of 4 p.m. New York time

• The Nasdaq 100 rose 0.5%

• The Dow Jones Industrial Average rose 0.9%

• The MSCI World index rose 0.9%

Currencies

• The Bloomberg Dollar Spot Index fell 0.3%

• The euro was little changed at $1.1006

• The British pound rose 0.5% to $1.2931

• The Japanese yen rose 0.7% to 140.39 per dollar

Cryptocurrencies

• Bitcoin fell 0.6% to $30,595.88

• Ether fell 0.9% to $1,875.46

Bonds

• The yield on 10-year Treasuries declined two basis points to 3.98%

• Germany’s 10-year yield advanced one basis point to 2.65%

• Britain’s 10-year yield advanced two basis points to 4.66%

Commodities

• West Texas Intermediate crude rose 2.6% to $74.88 a barrel

• Gold futures rose 0.3% to $1,937.50 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Jason Scott, Tassia Sipahutar, Robert Brand, Vildana Hajric, Carly Wanna and Isabelle Lee.

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