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Dow Soars 220 Points after Core Inflation Rises Less Than Feared

Dow surges to an all-time high as investors digest inflation. President of the San Francisco Fed says it could taper by the end of the year.

SageFX - Aug, 12, 21

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Principal Points

  • Dow Jones surges to a new all-time high on Wednesday as investors digest latest inflation figures
  • President of the San Francisco Fed, Mary Daly, says the Fed could taper by the end of the year

Consumer prices in the US accelerated in July, but not to the extent analysts had expected. While the consumer price index rose 5.4% from a year ago, core inflation arrived at 0.3% on a monthly basis, below the forecasted increase of 0.4%. The core inflation rate, the one that excludes the categories of energy and foods, was well below June’s rise of 0.9%. The core figure over a 12-month period landed at 4.3%, a slight deceleration from June’s 4.5% inflation rate.

The significant drop in the core numbers suggested that the US may have already endured the peak in inflationary pressures. Core CPI is widely regarded as a more reliable inflation gauge as it is insulated from the frequent price changes in oil and foods. The backdrop of easing inflation expectations prompted market participants to reignite their risk appetite for stocks.

The Dow Jones Industrial Average popped 220.30 points to close at a new all-time high of 35,484.97. The S&P500 was also lifted by assuaged investors. The broad-based stock average added 0.25% to set a new record close of 4,447.70.

Stocks positioned to gain from the $1tn infrastructure bill were in fashion on Wednesday. Shares of material firms, industrials, and financials were among the biggest winners.

On the other hand, the Nasdaq Composite slipped modestly by less than 0.2% as losses in big tech stocks weighed on the tech benchmark.

Positivity Reigns Among European Markets

The Federal Reserve, tasked with the responsibilities to control price fluctuations and make sure the job market is running full steam, has been carefully studying every economic report over the past few months. As the economy is at risk of overheating due to the constant monetary stimulus, the US central bank has already acknowledged the recent increase in consumer prices.

Fed officials, however, point out that the all-items price index increase is inflated by one-off factors due to the swift economic reopening. Believing inflation is “transitory”, Fed policymakers expect prices to moderate as the economic recovery continues.

Fed’s Mary Daly spoke to the Financial Times yesterday, saying the Federal Reserve could start scaling back its ample monetary stimulus because the economy has already strengthened enough so that it wouldn’t need a monthly cash injection of $120bn.

“I remain very optimistic and positive about the fall and ongoing improvements in the key variables we care about,” Ms. Daly said during the interview. “That for me means it’s appropriate to start discussing dialing back the level of accommodation that we’re giving the economy regularly, and the starting point for that is of course asset purchases.”

“Talking about potentially tapering those later this year or early next year is where I’m at,” said Ms. Daly.

The Fed has previously said that once policymakers decided to roll back the ultra-accommodative monetary stimulus, they would make sure to inform the markets well in advance.

On the other side of the Atlantic, European markets on Thursday keep steady near all-time highs. The Stoxx 600 Europe advanced near the 475-threshold on Wednesday, setting a new record high of 474.32. All major European bourses finished the day in the green.

Crypto assets this morning have slightly reversed from their weekly peak. Bitcoin today is trading above the $45,000 mark, while ether is lower by about 2%, hovering around $3,130 per token.