Why did US shares jump on Friday?
Hints of a softer economy and inflation buoy sentiment.
Glimmers of easing in inflationary pressures could mean a slightly less aggressive Federal Reserve in the months to come, and that's giving markets some breathing room.
The broad-market S&P 500 surged 3.1% on Friday, in its biggest one-day gain in percentage terms in more than two years. The technology-heavy Nasdaq Composite added 3.3%. Both indexes recouped their losses from the previous week, when the S&P 500 slipped into bear market territory.
“Recently released economic metrics have been coming in softer than expected and, as such, the equity market is now pricing in a lower flight path of additional rate hikes through the end of the year,” says David Sekera, chief US market strategist at Morningstar.
The CME Group’s FedWatch tool now shows investors ratcheting back their expectations for US rate hikes in 2022. Now, 42.2% expect the target rate to be in the range of 3.25%-3.50% by December, up from 24% expecting that a week ago. Meanwhile, expectations for the federal-funds rate to be in the 3.50%-3.75% range have been declining.
The Federal Reserve raised the federal-funds rate by three fourths of a percentage point to a 1.5%-1.75% range at its last meeting and said it would consider a 0.50- to 0.75-percentage-point hike at its July meeting.
The latest University of Michigan Consumer Sentiment Index, which showed consumers’ inflation expectations—a measure tracked closely by the Federal Reserve—dropped slightly from preliminary estimates released in early June. Consumers now see inflation rising at an annualized rate of 5.3% compared with earlier expectations of 5.4%.
The S&P Global Flash US Composite PMI Index, a survey of purchasing managers in the manufacturing and services sector, also showed inflationary pressures were easing amid a sharply slowing economy.
As a major driver of the global inflationary wave, lower energy prices are also signaling some relief could be in sight. WTI crude settled Friday at US$107.62 per barrel, down from $120.67 two weeks ago amid concerns about slower economic growth and ample supplies.
Falling crude weighed on energy stocks. The US energy sector continued its lagging performance, ending the week down 1.68%, making it the worst-performing sector. Similarly, the S&P/ASX 200 Energy index fell 4.5% last week.
“We think the market became oversold,” says Morningstar’s Sekera. “In fact, there have only been a few other instances in which the markets have traded at such a large discount to our intrinsic valuation.”