US stocks rose on Friday to deliver a fourth straight week of gains for Wall Street, as early signs that inflation has steadied tamped down investor expectations of more aggressive interest rate rises from the Federal Reserve.
The four-week streak of increases is the longest since late 2021, before worrying economic readings shoved stocks into a bear market.
The blue-chip S&P 500 index rose 1.7 per cent on Friday, delivering a weekly gain of 3.3 per cent, while the technology-heavy Nasdaq rose 2.1 per cent for a weekly gain of 3.1 per cent. The indices are up 18 and 24 per cent, respectively, from their lows hit in mid-June. They remain well below record highs hit months ago, however.
US inflation data this week came in lower than expected, with the US consumer price index rising 8.5 per cent year on year in July, below economists’ forecasts of 8.7 per cent. The US also reported this week that prices paid to American producers for goods and services registered an unexpected fall last month because of lower fuel costs.
Interest rate expectations have fallen with the dip in prices, though various Federal Reserve officials have said that inflation remains high and far above the central bank’s 2 per cent target. Both higher rates recently imposed by the Fed — which raise borrowing costs for companies — and the resulting spectre of recession weighed on stocks earlier this summer.
Expectations in the futures market for the Fed’s benchmark interest rate level by year-end have fallen from 3.6 per cent before Wednesday’s CPI report to 3.5 per cent as of Friday. That comes after blistering jobs figures last week which showed that wages remain strong across sectors and unemployment at pre-coronavirus pandemic lows.
“Last week we saw some very strong macroeconomic data, particularly the jobs numbers. That had people worried that the Fed might ramp up rate hikes again. But this week, the softer CPI and [producer price index] data might be early signs we are actually getting the soft landing the Fed has been promising,” said Tom Graff, head of investments at Facet Wealth.
“I am optimistic that the bottom is already in,” said Graff.
A consumer sentiment index released by the University of Michigan on Friday also signalled that consumers are more upbeat about the state of the US economy than anticipated by economists.
In Europe, the regional Stoxx 600 ended the day up 0.2 per cent, while Germany’s Dax rose 0.7 per cent. London’s FTSE 100 closed 0.5 per cent higher.
Confidence about the economy was less evident in the Treasury market, however, where the yield on the benchmark 10-year note, which moves with growth and inflation expectations, dropped 0.04 percentage points to 2.84 per cent. The yield on the two-year note, which moves with interest rate expectations, rose by 0.03 percentage points to 3.25 per cent.
“There seems to be a huge disconnect between what the Fed is saying and how the market is reacting,” said Roger Lee, head of UK equity strategy at Investec. “Our view is this is a bear market rally.”
Trading volumes can be thinner during the summer, exacerbating asset price moves. “Maybe we shouldn’t read too much into summer illiquidity but the moves have been a bit all over the place of late,” wrote Jim Reid, a strategist at Deutsche Bank.
In UK debt markets, the 10-year gilt yield rose 0.01 percentage points to 2.1 per cent, while the pound slipped 0.6 per cent against the dollar to $1.21.
Those moves came as data showed the UK economy contracted in the second quarter of 2022 by 0.1 per cent after rising 0.7 per cent in the previous quarter, with overall figures close to those expected by economists and the Bank of England.