Investment Insights Investment Strategy

US Inflation Report Boosts Stocks

  • Aug 17, 2022
  • Andrew Gillham

Global stocks rallied for a fourth straight week, boosted by a key report suggesting inflation in the US may have peaked. Quarterly corporate earnings reports also provided more grounds for optimism. The blue-chip S&P 500 and technology focussed Nasdaq indices each gained 3.8%.

Walt Disney shares jumped more than 5% after it reported revenues and profits in the second quarter topped analysts’ forecasts. The entertainment giant’s digital streaming platforms, Disney+, Hulu and ESPN+, added 15.5 million subscribers and their combined paid subscriber base of 221 million overtook Netflix for the first time.

The video streaming businesses, however, lost $1.1 billion during the quarter, reflecting the higher cost of content, and it will hike the monthly price of Disney+ by $3 to $10.99 as it strives to become profitable by 2024.

Overall, Disney’s net profit was $1.4 billion, a 53% increase from the same period a year earlier. Its theme parks were a bright spot with visitor numbers climbing above pre-pandemic levels.

Saudi Aramco, the world’s largest oil producer, reported a record breaking $48 billion profit for the 3 months to the end of June. Not only is it the company’s highest quarterly profit since its IPO in 2019, it’s also a record for a listed company.

Aramco, unlike most other oil majors, resisted increasing its dividend and instead will use much of the profits to fund a huge capital expenditure programme and reduce debt. Its largest shareholder, the Kingdom of Saudi Arabia, will receive 94% of the total $18.8 billion dividend payment.

Whilst earnings helped to lift sentiment, the biggest boost for stocks came from the US inflation report which revealed consumer prices rose at an annualised 8.5% in July, slower than the 9.1% increase in June. Food and accommodation prices continued to rise during the month but the headline figure was pulled lower by falling energy and gasoline prices.

The positive market reaction reflects investors’ hopes that the Federal will not need to raise interest rates as aggressively as feared to bring inflation back down towards its 2% target rate.

The Office for National Statistics reported the UK economy contracted 0.1% in the second quarter as households tightened their belts amidst the squeeze on real incomes. Household consumption, which accounts for around two-thirds of GDP, fell 0.2%.

Real wages, wages adjusted for inflation, in the UK fell 3% in the three months to July, the steepest decline since records began in 2001. With inflation expected to climb into double digits in the autumn, the deficit will grow further in the coming months. Against this backdrop, more industrial action and disruption to services is inevitable.

Energy prices extended their declines and Brent Crude fell to $95 a barrel, the lowest level since the start of the conflict in Ukraine, on growing evidence of a slowing global economy. Demand from China, the world’s largest oil importer, has fallen to a 2-year low with sectors of its economy shuttered by covid lockdowns.

The supply outlook has also improved as Libya has made good progress in ramping up production and there is more than a glimmer of hope that 2015 Iranian nuclear accord can be revived, allowing Iran to resume exports. Iran’s Foreign Minister Hossein Amirabdollahian hinted a deal could be just days away if the US shows some flexibility to resolve the outstanding issues.

(Cover Image Source: Jason Leung)

TEAM Asset Management is a trading name of Theta Enhanced Asset Management Limited which is regulated by the Jersey Financial Services Commission.