US Stocks Surge on Lower PPI

Nearly 85% of US stocks rose on Tuesday, 13 August, in one of the “best days of the year,” with major indices advancing on slower producer price index (PPI) inflation data. 

The S&P 500 rallied 1.7%, the  Dow Jones (USA 30) gained 1%, and the tech-heavy  Nasdaq (NDAQ) climbed a staggering 2.3%, driven by Nvidia (NVDA) and the "Magnificent Seven".

The weaker-than-expected PPI rise of 0.1% in July suggested a weaker consumer price index (CPI) ahead, which increased the probability of the Federal Reserve cutting interest rates by 50 basis points in its upcoming September FOMC meeting. 

Investors now await confirmation of the July CPI report, due Wednesday, 14 August, to see whether the Nasdaq's 5-day winning strike can continue.

PPI Boosts Soft Landing Optimism

The PPI miss may have acted as a catalyst for Tuesday's gains, reinforcing the belief that the central bank has brought inflation under control. This resulted in improved sentiment following the recent market correction on Monday, 5 August, as investors started to view it as an overreaction on the back of the subsequent rally.

In fact, investor confidence in a soft landing improved, with now 76% of respondents saying that they believe it is the most likely outcome to witness in the next 12 months, according to Bank of America's (BAC) August Global Gund Manager Survey. 

Notably, the optimism seems to have added to the positive recent market performance as investors started allocating to cash and bonds at the fastest rate since last September, reflecting potential rate cuts. 60% of the 585 respondents said they expected the Fed to cut four or more times until the year ends.

Corporates Add to Gains

Several companies also contributed to the market rally, driven by a combination of leadership changes, upbeat sentiment, and corporate earnings.

Starbucks (SBUX) was among the top performers, soaring over 20% after the announcement of its new CEO, Brian Niccol, the head of the Chipotle (CMG) restaurant chain, which ultimately fell 7.5%. 

In addition, Monday.com (MNDY) and Barrick Gold (GOLD) surged 14.8% and 9.1%, respectively, following EPS beats in their Q2 earnings report. 

Home Depot (HD) also saw a boost despite declining comparable sales as it beat earnings and revenue estimates, and Nvidia's 6.5% rise was attributed to positive comments after Goldman Sachs (GS) strategist, Scott Rubner, labelled it as the 'most important stock' in 2024.

Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL) and Meta Platforms (META) also posted solid gains, contributing to the overall gains. (Source: Investopedia)

Market Outlook Uncertain

Market participants expect the Fed to cut interest rates significantly into 2025 in response to concerns about an economic slowdown or recession outweighing inflation worries. However, while some data on Tuesday showed milder inflation increases, some economists cautioned that the data had uneven and erratic elements. In contrast, others warned that cutting rates so aggressively could reignite inflation.

This week's CPI and retail sales data could influence short-term sentiment around the Fed's policy decisions.

In the longer term, the Fed may also be influenced by the actions of other major banks in the medium and long term. 

The European Central Bank (ECB) lowered interest rates in June and may repeat this in September and December, according to a recent Reuters poll. Moreover, the Bank of England (BOE) also reduced its interest rates, and recent inflation data improved the chances of further cuts. Meanwhile,  the Royal Bank of New Zealand (RBNZ) has the last to cut rates on Wednesday, 14 August, for the first time in over four years, reflecting the bank's pessimism around economic projections. 

Besides dovish central banks, some economists still remain cautious of Bank of Japan's (BOJ) recent hike. They fear that a rate cut by the Fed will reduce the interest rate differential between the two central banks and further unwind the carry trade.

Conclusion

While the recent market performance was buoyed by a slower rise in PPI inflation and optimism around potential Federal Reserve rate cuts on Tuesday, the Fed's outlook remains uncertain.

Upcoming CPI and retail sales data will be critical for short-term sentiment and whether investors can confirm the PPI drop was not a one-off event. As such, investors may keep a close eye on other central bank actions, as aggressive rate cuts could reignite inflation. 

With a rather complex economic and monetary landscape globally and varying central bank actions and mandates, opportunities for gains may exist, but risks may be even more significant.