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Dow Jones is no longer surprised by record inflation. Expectations for a 100 bp Fed rate hike hit 38% in July

4 min 24

The American stock market continued to decline in trading on Wednesday, July 13, against the backdrop of record inflation data in the United States since 1981. As a result of the trading session, Dow Jones Industrial records a decrease of 0.67%. The S&P 500 broad market index and the Nasdaq Composite, a leading indicator of tech stocks, fell 0.15%.

Consumer sector stocks have taken the lead in DJI. Market leader Nike (NKE) increased capitalization by 1.3%. Home Depot (HD), Procter & Gamble (PG) and McDonalds rose 0.5% to 0.7%. Worse than the market – UnitedHealth (UNH) -2.56% and Boeing (BA) -2.17%. Among Big Tech, the mood is also mixed. If Microsoft (MSFT) and Apple (AAPL) lost about a third and a quarter of a percent, then Aplhabet (GOOG) fell 2.3%, while Amazon (AMZN) gained 1%.

Delta Air Lines did not support the S&P 500

Investors continued to monitor the corporate results of the industry leaders for the second quarter. Delta Air Lines (DAL) presented rather mixed results of financial activity, which paid off in the form of a drop in its shares by 4.4%.

Traders of the Dow Jones index are no longer surprised by record inflation. Photo: Yandex

Despite a rise in revenue to $13.82 billion, adjusted earnings were only $1.44 per share versus the expected $1.73. Delta became the first US airline to report second-quarter earnings. United (UAL) and American (AAL) will report their data next week.

Inflation remains at a record

The main inflationary indicator – the consumer price index in June rose by 9.1% in annual terms, exceeding the record data of May at 8.6%. And this is the main news of the day. Economists polled by Dow Jones expected growth of no more than 8.8%. The core figure, which excludes food and energy prices, reached 5.9%, beating the expected estimate of 5.7%.

The next “meeting” of Jerome Powell with colleagues will take place on July 27. At the previous meeting in June, his department raised the key rate by 0.75%. This step turned out to be the most impressive in the last 28 years – a similar increase took place back in 1994.

Therefore, on the eve of today’s data on inflation, market participants spoke without any guarantees about a similar increase in July. But after the release of the next historical records from the US Department of Labor, the scenario of an increase of 75 basis points turns into a base one, and the question of whether the regulator will stop there turns into a rhetorical one.

After the release of data on June inflation, futures contracts for the Fed rate showed a sharp increase in the probability of its increase by 100 basis points from 12% to 38%. At the same time, analysts, which looks very nice, are actively urging the American central bank on the most aggressive actions with the refrain “so that inflation expectations, which often work as a self-fulfilling forecast, do not become a trend,” writes The Wall Street Journal.

An increase in rates, and even more so its acceleration, multiplies the chances of a recession in the current 2022. It is this scenario that is expected in the American Bank of America and Wells Fargo, as well as the Japanese Nomura. Still optimistic analysts at JPMorgan Chase emphasize that July and September increases may play into the hands of a negative outlook for the US economy.

Inflation and the further movement of the Dow Jones

There is no doubt that we have witnessed a powerful inflationary spiral. But at the current moment, and we are talking about it, prices for some product groups are starting to decline.

This can be seen in oil prices, for example, which have already lost tens of percent of their recent maximum values. The West Texas standard is quietly trading at $96, although just a month ago the price tags exceeded $120 per barrel. A similar situation is observed with the prices of gasoline and real estate.

This may hint to us that growth has hit its maximum, because the consumer price index cannot be a leading indicator, it is actually lagging.

“The market is beginning to believe that peak inflation has been reached, and that there is already enough data to understand this,” analysts at Morgan Stanley wrote. And drawing historical analogies, MS economists even expressed their pleasure at how the market performed on Wednesday. Of course, it will not be positive for the market if inflation rates do not decrease as quickly as we would like, but this is already a conversation about something else.

The latest trading session shows readiness for a pullback, but on Thursday investors are waiting for the results from major banks, including JPMorgan and Morgan Stanley, to back up their hopes with at least some facts, or at worst, reasons.

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