Stock Market ascends slightly following a modest increase in July's inflation rate
In the world of finance, the month of July 2021 was marked by a complex interplay of inflation, employment, and monetary policy.
U.S.-listed shares of On Holding soared by 11.6% after the sportswear maker raised its annual sales forecast. Meanwhile, the inflation data in mid-2021 played a critical role in shaping the Federal Reserve's (Fed) interest rate decision for September 2021. Inflation remained above the Fed’s 2% target largely due to tariff-related cost increases, but signs of a slowing labor market and concerns about economic growth led some Fed officials to consider a rate cut despite elevated inflation risks.
The July jobs report was weaker than expected, indicating slower hiring, which increased the likelihood the Fed would cut rates to support employment and growth. However, many Federal Open Market Committee (FOMC) participants in July emphasized the upside risk to inflation from tariffs and supply-side pressures, which argued against cutting rates immediately. This tension shaped market expectations and internal Fed debates leading into the September 2021 interest rate decision, which was widely anticipated to potentially feature a rate cut or a pause signaling accommodative policy.
Market tools such as the CME FedWatch indicated a rising probability of a September rate cut based on these evolving inflation and employment data. The Fed’s decision was framed as a difficult choice between its dual mandate: maintaining stable prices and maximizing employment, both of which were under stress in different directions due to inflation persistence and hiring slowdown.
Amidst this economic landscape, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite were all inching higher, reflecting the confidence in the market. Data from BofA Global Research showed that inflows into U.S. stocks last week were the largest in two years.
The U.S. and China extended their tariff truce until November 10, providing a temporary relief from tariff-driven price increases. However, John Velis, a macro strategist at BNY, expressed concerns about the potential impact of tariffs on inflation data in the autumn.
In the corporate sector, Palo Alto Networks gained 2% after brokerage Piper Sandler raised its rating on the cybersecurity stock to "overweight" from "neutral". Among single stocks, Intel rose 1.7% after Trump praised CEO Lip-Bu Tan following their meeting on Monday.
On the downside, Cardinal Health dropped 9% after the drug distributor announced it will buy healthcare management firm Solaris for $1.9 billion.
In terms of market trends, yields on shorter-dated Treasury bonds moved lower after the data, while the S&P 500 posted 14 new 52-week highs and eight new lows, and the Nasdaq Composite recorded 43 new highs and 44 new lows. Interest rate futures show a 88.8% chance that the Fed could lower interest rates by about 25 basis points in September.
Eight of the 11 S&P 500 sectors were in gains, with energy leading with a 0.8% rise. Advancing issues outnumbered decliners by a 2.44-to-1 ratio on the NYSE and by a 1.78-to-1 ratio on the Nasdaq.
As the economic landscape continues to evolve, markets are closely monitoring developments around Trump's nominee E.J. Antoni to the Bureau of Labor Statistics commissioner post, potential candidates for the Fed's top job, and the potential impact of tariffs on inflation data in the autumn.
- In the corporate sector, a trader might have purchased more stocks like On Holding or Palo Alto Networks, as they responded positively to specific events and financial analysts' recommendations.
- The inflation data in July and August significantly influenced the Federal Reserve's decision on interest rates, with the latter showing an 88.8% chance of a rate cut in September, according to interest rate futures.
- Interestingly, even with the potential rate cut and concerns about inflation, some indexes such as the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite were still inching higher, reflecting a surprising level of confidence in the market.
- In the world of finance, bond traders might have leaned towards purchasing shorter-dated Treasury bonds as their yields moved lower after the latest data, anticipating the Fed's accommodative policy.
