Stock Market and Inflation Dynamics
The stock market experienced a mixture of gains and losses this Wednesday as investors assessed the latest Consumer Price Index (CPI) figures. According to Sevens Report, the market ended the day with a modest rise of 0.38%. Initially, optimism was high as the headline July CPI came in below expectations, marking a drop in inflation below 3% for the first time since early 2021. However, the core CPI remained steady at 3.2%, still above the Federal Reserve's 2% target, leading to a more cautious attitude.
The S&P 500 began the session with a strong rally, fueled by positive headline CPI data, but enthusiasm waned when core CPI figures met expectations. This resulted in a period of flat trading, only to pick up later as dip buyers entered the market, pushing the S&P 500 to new weekly highs. Despite these gains, the absence of strong upward momentum led to a slight pullback in the afternoon, with the index closing just above 5,450.
Sector Performance and Trading Dynamics
Sector performance varied, with financials leading the way with a 0.61% gain, while other indices like the Nasdaq remained flat, and another fell by 0.52%. Financial gains were boosted by strong earnings reports from insurance companies, particularly Progressive, which rallied by 5%. However, sectors like communications and consumer discretionary lagged due to potential regulatory actions against Alphabet and concerns over upcoming retail earnings.
Why Falling Inflation No Longer Boosts Stocks
According to Sevens Report, the historical positivity of declining inflation for stocks has shifted. Over the past 18 months, falling inflation consistently lifted stocks, but now, it's an expected trend. With inflation at more normal levels, surprises are less likely, shifting focus to economic growth and Federal Reserve policy.
Potential Catalysts for Future Market Movements
Future market catalysts include economic growth data and the Federal Reserve's policy stance. Reports on retail sales and manufacturing indices, alongside Federal Reserve Chair Jerome Powell's upcoming address at the Jackson Hole symposium, will be key. Strong growth data or the potential for significant rate cuts could rekindle a stock rally. Conversely, disappointing growth or a neutral tone from Powell could reverse recent gains, highlighting the market's delicate balance and high volatility potential.
