Investment Insights

US Inflation Report Spurs Rally

  • Jul 19, 2023
  • Andrew Gillham

Markets posted strong gains across the board last week, encouraged a report which revealed inflation in the US slowed more than expected. The blue-chip S&P 500 and technology focussed Nasdaq gained 2.6% and 4.1% respectively.

Concerns that more interest rate hikes are needed to tame inflation has hung over markets for the past 18 months but the US inflation report for June provides some hope that there is light at the end of the tunnel.

The annual increase in headline consumer price index slowed to 3.0%, the smallest increase in more than two years and lower than consensus forecasts of 3.1%. Gasoline prices picked up 1% from May, but are 27% lower than a year ago, and grocery price inflation slowed to 4.7%.

The core inflation rate, which excludes more volatile items such as food and energy, however slowed more modestly to 4.8% and money market futures are pricing in another quarter of a percentage point by the Federal Reserve at the end of the month. There is still some way to go before core inflation falls back to the Fed’s 2% target rate.

In contrast, inflation in the UK was expected to have stayed above 8% in June, meaning the gap between UK and US inflation its at widest level since the late 1970s. The UK was more impacted by spike in energy and food prices after Russia’s invasion into Ukraine and its labour shortages are more acute.

The Bank of England has more work to do bring inflation back down and expectations that interest rates in the UK will soon be higher than in the US has helped push Sterling to a 17-month high versus the Dollar.

China’s National Bureau of Statistics reported its economy grew 6.3% from a year earlier in the second quarter, versus consensus forecasts of 7.3%. Activity in the world’s second largest economy has thus far failed to recover as quickly as hoped once pandemic restrictions were lifted and youth unemployment has risen to a new record high of 21.3%. The pressure on state planners to provide more stimulus is mounting.

In company news, a US federal judge rejected the Federal Trade Commission’s motion for a preliminary injunction to block Microsoft completing its acquisition of Activision Blizzard. The FTC has sought to halt the $69 billion deal on the grounds that it will hurt competition and enable Microsoft to make Activision games such as Call as Duty exclusive to the Xbox games console.

To address FTC concerns, Microsoft had agreed to license Call of Duty to Nintendo for the next 10 years and over the weekend it announced a similar deal with Sony to allow games to access it on a PlayStation. Shares in Activision gained 12% over the week to $93, just $2 shy of the price Microsoft agreed to pay when the deal was announced in January 2022.

Second quarter corporate earnings season got under way last week, highlighted by the Wall Street investment banks on Friday. JPMorgan, the largest bank in the US, reported profits jumped by 67% to a record $14.5billion.

Higher interest rates have provided tailwinds for banks’ earnings by increasing net interest income, the difference between the revenues banks earn on loans and interest paid to savers, and JPMorgan was further boosted by its emergency rescue of First Republic Bank amid the US regional banking crisis. Net income attributable to First Republic was $2.4 billion, partially offset by a $1.2 billion provision to cover bad loans.

Wells Fargo wasn’t far behind, reporting profit surged 57% in the second quarter to nearly $5 billion, but Citigroup saw profits fall due to costs relating to staff lay-offs and a downturn in dealmaking activities.

Energy prices edged higher, including Brent Crude which rose $1 to $79 a barrel. Concerns over lacklustre growth in China, the world’s largest importer of crude oil, were offset by expectations of a tightening of US crude supplies. The benchmark price for Russian Urals crude topped the $60 price cap set by the G7 for the first time, reflecting strong demand for its oil at discounted prices from countries such as China and India.

(Cover Image Source: Travis Leery)

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