U.S. stock futures rally to three-month high amid peak inflation optimism

U.S. stock futures rose to their highest in three months on Thursday, as hopes that inflation may have peaked continued to power the risk asset rally.

How are stock-index futures faring
  • S&P 500 futures
    ES00,
    +0.20%

    rose 7 points, or 0.2%, to 4,217

  • Dow Jones Industrial Average futures
    YM00,
    +0.30%

    climbed 65 points, or 0.2%, to 33,326

  • Nasdaq 100 futures
    NQ00,
    +0.10%

    added 36 points, or 0.3%, to 13,428

On Wednesday, the Dow Jones Industrial Average
DJIA,
+1.63%

rose 535 points, or 1.63%, to 33310, the S&P 500
SPX,
+2.13%

increased 88 points, or 2.13%, to 4210, and the Nasdaq Composite
COMP,
+2.89%

gained 361 points, or 2.89%, to 12855. The S&P 500 is up 14.8% from its 2022 closing low hit in mid-June but remains down 11.7% for the year to date.

What’s driving markets

The positive reaction to a cooler-than-expected U.S. inflation report on Wednesday continued to reverberate across markets.

Hopes that the pace of price rises has hit a peak encouraged investors to believe the Federal Reserve can be less aggressive in hiking borrowing costs and that consumer confidence can improve.

Traders have piled back into equities in response, particularly growth stocks that had been so badly hit in the market rout during the first half of the year, a move that has pushed the tech-heavy Nadasq Composite up 20.8% from its mid-June trough. The S&P 500 was in line to open at its highest since May.

“The softer than expected U.S. inflation reading pushed the market odds narrowly back in favor of a +50 basis point Fed hike in September…and delivered a significant boost to long-duration assets. Growth stocks beat their value counterparts across all the major regions,” said Ian Williams, economics and strategy research analyst at Peel Hunt.

Alex Pelle, U.S. economist at Mizuho, said in a note to clients: “We do have some very preliminary evidence that inflation may be taking a step down from an underlying pace around 8% to the something closer to the 5% level. This is a level that will still keep the Fed hiking, but the July round of data—taken as given—gives the bulls an early win.”

Also supporting the upbeat tone was a well-received earnings report from Walt Disney
DIS,
+3.98%
,
which helped the media group’s shares bounce 5.9% in premarket action.

Overall, the second quarter earnings season has helped underpin the market. With companies representing 91% of S&P 500 market capitalisation having reported, sales growth has been 15.1% and earnings growth 7.9% – surprising by plus 3.5% and plus 3.6%, according to Evercore ISI.

However, the latest surge in stocks may have left the market over-extended and vulnerable to a pullback. The CBOE Vix index
VIX,
+1.32%
,
an options-based gauge of expected S&P 500 volatility, has dipped below its long-run average of 20, suggesting traders may be getting a tad complacent.

In addition, the S&P 500’s 14-day relative strength index, a closely watched momentum gauge is around 74, where any reading above 70 is considered overbought territory. The RSI for market behemoth Apple
AAPL,
+2.62%

is 76, the highest since December.

Data due for release on Thursday include the weekly initial jobless claims report and producer prices, both set to be published at 8.30 a.m. Eastern.

How are other assets faring
  • Oil was again struggling, with the U.S. WTI crude future
    CL.1,
    +0.80%

    down 0.7% to $91.31 a barrel.

  • The 10-year Treasury yield
    TMUBMUSD10Y,
    2.777%

    fell 2 basis points to 2.764%.

  • The ICE Dollar index
    DXY,
    -0.21%

    fell 0.2% to 104.97 as traders priced in a less aggressive Fed. But a softer buck did not help gold
    GC00,
    -0.49%
    ,
    which lost 0.6% to $1,083 an ounce

  • Bitcoin
    BTCUSD,
    +2.49%

    advanced 2.3% to $24,410.

  • Asia markets mostly got a lift from Wall Street’s overnight surge with Hong Kong’s Hang Sang
    HSI,
    +2.40%

    adding 2.2%, though Japan missed out because of the Mountain Day holiday. In Europe the Stoxx 600
    SXXP,
    +0.09%

    was up 0.2%.

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