Key facts
- The S&P 500 has reached record highs, with a 5.75% gain over a four-day period.
- Upcoming US consumer price index (CPI) data is expected to influence Federal Reserve interest rate decisions.
- Economists forecast a 3.4% year-over-year rise in CPI and a 2.5% rise in core CPI.
- Markets are pricing in a nearly 60% probability of a Fed rate hike in September.
- Higher Treasury yields are a concern for stock market investors, potentially making bonds more attractive.
- Oil prices have pulled back below $80 a barrel, easing some inflation worries.
The U.S. stock market, led by technology and semiconductor shares, has reached record highs, but this rally faces a significant test from upcoming inflation data. The closely watched U.S. consumer price index (CPI) report, due on Wednesday, could influence the Federal Reserve's stance on interest rates.
The S&P 500 has seen a strong surge in recent weeks, pushing its year-to-date gain to over 12%. This upturn has been supported by corporate earnings that are exceeding expectations for the second consecutive quarter. However, market participants are expressing "inflation anxiety," with the CPI data expected to provide clarity on whether the Federal Reserve might consider further rate hikes.
Economists polled by Reuters anticipate the July CPI to rise 3.4% year-over-year, with core CPI excluding volatile food and energy prices projected to increase by 2.5%. Some strategists believe that a moderation in inflation could prevent the Fed from hiking rates this year, while a higher-than-forecast CPI could lead to a stock market sell-off.
At its last meeting, the Federal Reserve held interest rates steady, but there were dissenting votes favoring a hike. Current market pricing indicates a nearly 60% probability of a rate increase at the Fed's September meeting. Concerns about persistent inflation and potential Fed rate hikes have contributed to rising Treasury yields, which are viewed as a risk to the equity rally as they make bond investments more competitive and increase borrowing costs.
The benchmark 10-year Treasury yield has recently pulled back to 4.67%, coinciding with a drop in U.S. crude oil prices below $80 a barrel. Volatility in oil prices is being closely monitored, as rising prices could increase inflation and heighten the likelihood of Fed rate hikes.
In addition to the CPI report, the market will also receive producer price index data and retail sales figures later in the week. While the earnings calendar is relatively quiet, technology and semiconductor companies, which have been key drivers of the market rally, will remain in focus. Despite strong earnings, the Philadelphia SE Semiconductor index has experienced significant daily swings and remains down from its late-June high, indicating continued caution among investors.