In a choppy market, equities made further gains following the latest US inflation data, providing the possibility that peak inflation is behind us. Consumer price inflation (CPI) came in at 8.5% for the year to July, down from 9.1% the previous month, and for the month of July itself inflation was flat. Falling petrol prices were the main contributing factor.
As of 12pm on Friday, London time, US equities rose 1.5% over the week, with the technology sector gaining 1.0%, having risen just over 20% from its recent trough. European equities, despite the soaring cost of natural gas, also made gains rising 1.1%, whilst UK equities were up 0.7%. The Japanese market increased by 1.3%, but the Australian market could only manage a gain of 0.2%. Emerging markets rose 1.1%, helped by dollar weakness and an increase in commodity prices, with Latin America rising by 4.9%.
Developed government bond markets were relatively benign, with 10-year US Treasury yields rising (yields move inversely to prices) to 2.87%, German bunds 0.99% and UK gilts 2.10%.
Gold prices moved up 0.5%, now trading at $1,800 an ounce, whilst industrial commodities and crude oil showed greater strength. Copper increased by 3.9%, to $8,165 a tonne, and Brent crude rose by 3.6%, priced at $98.3 a barrel. Whilst futures in European natural gas, for delivery in one month, rose almost 10% over the week, having risen over five-fold year to date and over sixteen times since the start of 2020, pre the pandemic.
Markets started the week on a sour note, as results from US chipmaker Micron Technology warned of slowing consumer demand for chips in personal computers and smartphones. This followed weak guidance from Nvidia, also a manufacturer of semiconductor chips, as revenues for the second quarter fell 19% versus the first quarter, with revenue from gaming components being behind the fall. However, market sentiment improved swiftly on the release of the CPI data, although inflation remains at very elevated levels. On Thursday, the latest index for prices paid (PPI) to US producers for goods and services also came in unexpectedly low, with PPI dropping by 0.5% in the month of July, the first decline since April 2020.
Whilst it remains too early to call the top in inflation with any great certainty, the softening in prices in recent months has been taken very positively by markets, with world equity markets having risen by over 12% since their recent lows. However, the softening in inflation data does not signal the end of interest rate rises and by extension, nor does it remove the threat of a recession. And, as on cue, data released out of the UK on Friday showed a contraction in the economy of 0.1%, versus growth of 0.7% in the previous quarter.
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