The news that inflation is falling more sharply than expected in the world’s biggest economy has cheered investors and driven global stock markets sharply higher this week
Wednesday’s consumer price index (CPI) report in the United States showed that prices rose at an annualised rate of 3% in June, marginally lower than market expectations. This is the latest indication that the Federal Reserve and other central banks may soon bring their interest rate raising programmes to an end. Elsewhere, reports of further stimulus measures by the Chinese government lifted stocks in Asia, while oil prices increased on fears that Russian output levels could fall in the months ahead.
On Wall Street, the Dow Jones Industrial Average ended trading on Thursday 2% up for the week so far, with the S&P 500 gaining 2.5%. The positive CPI data was backed up later in the week by figures that showed producer price inflation had fallen for a 12th consecutive month in June. Traders now predict that a 0.25 percentage point interest rate increase later this month will be the Fed’s last hike of its current cycle. The prospect of lower rates helped technology stocks make solid gains, although reports of a rise in new unemployment claims earlier in July was further evidence of America’s tight labour market – a factor that could increase inflationary pressures in the months ahead.
In the UK, the FTSE 100 closed on Thursday 2.5% up for the week so far – thanks to strength in energy companies and optimism about falling US inflation. However, gains in London were limited by a rise in the value of sterling against the dollar. Figures that showed UK wage growth running at 7.3% a year in June were another indication that the Bank of England may need to continue raising rates for significantly longer than the Fed. Meanwhile, mortgage rates continued their upwards trajectory, and analysts downgraded earnings forecasts in Britain’s property sector. Recent government data revealed that UK GDP had declined in May following April’s small uptick.
In Frankfurt, the DAX index ended Thursday’s session up 3.4% for the week, while France’s CAC 40 gained 3.6%. Share prices in the eurozone benefited from optimism about economic growth in both the US and China, although research published on Tuesday suggested confidence among businesses in Germany had fallen to a seven-month low. Nonetheless, investors are hopeful that the higher rates introduced over the past 12 months by the European Central Bank will be as effective in bringing inflation under control as they appear to have been across the Atlantic.
In Asia, the Hang Seng index in Hong Kong surged 5.4% to end a dismal run that started in mid-June. News that the Beijing government was planning fresh stimulus measures to boost growth in China’s beleaguered real estate sector drove prices higher on Tuesday, and there were further gains during Thursday’s session after ministers indicated that the recent crackdown on major Chinese technology companies could soon come to an end. Meanwhile, having set the pace for much of 2023, Japan’s Nikkei 225 index of leading shares advanced by just 0.1%, with the weakening dollar weighing on prices to some extent.
Hong Kong Hang Seng
Note: all market data contained within the article is sourced from Bloomberg unless stated otherwise, data as at 13 July 2023.