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Markets coast with small dip in face of red-hot inflation

Despite another booming inflation report this week, Wall Street managed to rally and end Friday with only slight losses.

MANHATTAN (CN) — Inflation continues to rage, but analysts are beginning to see the light at the end of the tunnel. Judging by the minimal impact recent inflation data had on Wall Street this week, it appears that investors may be, as well.

Markets on Friday surged, recouping most of the week’s losses but not enough to end the week in the black. By the closing bell, the Dow Jones Industrial Average gained 655 points to end up the week down only 52 points since last Friday. The S&P 500 lost only 37 points this week due to Friday’s gains, while the Nasdaq fell just 183 points.

Many experts were relieved to see Wall Street’s moderate reaction to inflation data this week, but they also expect further market duress to come, with the S&P 500 possibly hovering around the 3,500 mark. Tom Essaye of the Sevens Report said investors are “positioning for a potential future economic slowdown” in their trading, adding that the market likely has not yet seen its bottom.

“Bottom line, I much prefer this resilient market performance to the nightmares of April, May and June. But I do not think this resilient performance is indicative of a market bottom,” Essaye wrote in a Friday morning investor’s note. “I think stocks aggressively priced in a hawkish Fed and high inflation via the painful June declines, and markets don’t discount the same news twice.”

As for inflation and a hawkish Fed, investors got a dose of both this week. On Wednesday, the U.S. Bureau of Labor Statistics noted the consumer price index increased 1.3% last month to hit a whopping 9.1% over the last year.

The increases were mostly broad-based, but some sectors predictably led the pack. Gasoline saw an 11.2% increase in prices from May to June, with the price increase over the past year hitting nearly 60%. Most other sectors saw 1% or thereabouts increases in prices.

Gasoline prices may have hit their peak, though, with the dollar signs at the pump decreasing significantly over the past month and the crude prices on both the Brent and West Texas Intermediate exchanges dropping to roughly $100 per barrel by Friday. Some experts believe the WTI may fall below $90 a barrel by the end of 2022, which would cause gas prices to dip below $4 a gallon.

Food prices also may come down soon, as agricultural crop prices have dipped recently, with grocery store prices gaining only 0.1% last month, though the corresponding decrease in consumer prices typically takes months.

As a result of the BLS’ inflation data, it seems the Federal Reserve will remain hawkish, possibly even more so.

“The June CPI release was an ugly print, no getting around it,” said Cliff Hodge, chief investment officer at Cornerstone Wealth in North Carolina. “The Fed has no choice but to follow through on a more aggressive path, which raises the probability of recession next year.”

Nearly all analysts predict the Fed will increase the federal funds interest rate by 75 basis points during its next two meetings in the end of July and again in September, but some are even speculating whether the central bank may go for a 1% increase in rates at some point.

A raft of other data this week show an economy teetering between one that is extremely strong to one that could start to sink into a recession.

Retail sales data released Friday by the U.S. Census Bureau were slightly better than expected, increasing 1% in June. Retail sales from April 2022 through June 2022 were up 8.1% compared with the same period in 2021, a factor likely due to the rise of inflation during that time.

“The 1.0% [month-over-month] rise in retail sales in June isn’t as good as it looks, as it mainly reflects the boost in nominal sales values from surging prices,” Andrew Hunter, senior U.S. economist at Capital Economics, wrote in an investor’s note. “Real consumption appears to have been largely stagnant last month.”

Most of the gains were seen in gasoline station sales, which have risen 41.3% year over year and gained 12% just last month alone. The plateauing of real consumption unlikely will be enough to push the Fed to step up its tightening, but it also “does provide further reassurance that the economy isn’t plunging into a recession,” Hunter wrote.

On Thursday, investors were slightly spooked by JPMorgan Chase’s earnings report, which showed profit at the banking giant fell 28% in the second quarter compared with a year ago. The bank, which also announced it was suspending share buybacks, blamed the drop on a net credit reserve build of $428 million in anticipating of defaulting loans.

“In our global economy, we are dealing with two conflicting factors, operating on different timetables,” CEO Jamie Dimon said in a statement, contrasting a growing U.S. economy, tight labor market and robust consumer spending with price increases, the ongoing war in Ukraine and rising interest rates that will “likely to have negative consequences on the global economy sometime down the road.”

In its own earnings release, Morgan Stanley also reported worse-than-expected revenue, with a 55% decrease in investment banking revenue since 2021 due to a slowdown in mergers and acquisitions compared with the boom in 2021 for such deals. In a statement, CEO James Gorman noted Morgan Stanley’s wealth management division offset the losses in investment banking.

Finally, the University of Michigan’s preliminary July reading of consumer sentiment showed a slight gain to hit 51.1 and a 3.3-point increase in current economic conditions. “While the recent decline in national gasoline prices may offer some respite to consumers, sentiment is unlikely to improve materially over the near-term,” wrote John Canavan, an analyst at Oxford Economics.

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