North American markets jump as new data shows inflation may have already peaked

Canada’s main stock index posted triple-digit gains on Wednesday, while U.S. markets also jumped on the release of new data suggesting U.S. inflation may finally have peaked.

The latest Consumer Price Index report from the US Department of Labor Statistics positively surprised investors when it was released on Wednesday morning. The report showed that inflation in this country slowed to 8.5% at the consumer level in July, from 9.1% in June.

Stocks immediately jumped on the news. Inflation was the biggest economic challenge affecting markets in 2022, and the suggestion that it might start to subside was interpreted as very positive news.

The S&P/TSX Composite Index closed up 307.64 points at 19,885.94.

In New York, the Dow Jones industrial average rose 535.10 points to 33,309.51. The S&P 500 index rose 87.77 points to 4,210.24, while the Nasdaq composite rose 360.88 points to 12,854.81.

Tech stocks, cryptocurrencies and other riskier investments that have been hit hard in recent weeks benefited the most from the surge in investor optimism on Wednesday. The S&P/TSX capped information technology index rose 4.2% at the end of the day, making it the best performing Canadian sector on Wednesday.

Lesley Marks, chief investment officer at Mackenzie Investments, said the CPI report confirms the overheated US economy has started to slow. She said the report gave investors hope that future interest rate hikes by the US Federal Reserve and other central banks around the world need not be as severe as feared.

“The market is reacting because it thinks it will give central bankers an opportunity to take their foot off the brake (of the economy) if you want to, or not raise rates at the same pace as over the past last few months,” Marks said. .

Marks warned that inflation of 8.5% is still very high. She said that while Wednesday’s evidence of a cooling trend makes it more likely that the Federal Reserve will announce a 50 basis point hike at its Sept. 21 meeting, rather than a previously expected 75 basis point hike. , she is unwilling to comment. the higher rate increase.

“We’re not out of the woods yet, because central bankers typically target around the 2% inflation rate, and that’s way above that,” Marks said. “So directionally it’s positive, but we still have some work to do here to bring prices down.

In Canada, the latest inflation figures should be released next week. Marks said she expects the report to show that inflation has also peaked there and hopefully will also prompt the Bank of Canada to slow its own pace of interest rate hikes. interest.

But she warned that other parameters such as the performance of the housing market will also be factors as central bankers consider a way forward. Employment data, in particular, could have an impact, as unemployment remains very low and labor shortages remain an issue for many companies.

Marks pointed out that while bond prices spiked immediately after the release of the inflation report, driving their yields lower, that trend reversed later in the day and those falling yields evaporated. .

She said that means bond markets are still worried that central banks won’t be able to rein in inflation without tipping the economy into a full-scale recession.

“It’s a very different perspective than what we’ve seen on the equity side, where the view is that everything is clear,” Marks said.

The Canadian dollar was trading at 78.19 US cents against 77.64 US cents on Tuesday.

The September crude contract was down US$1.43 at US$91.93 a barrel and the September natural gas contract was up 37 cents at US$8.20.

The December gold contract rose US$1.40 to US$1,813.70 per ounce and the September copper contract rose 6 cents to US$3.65 per pound.

This report from The Canadian Press was first published on August 10, 2022.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD=X)

Amanda Stephenson, The Canadian Press

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