The stock market has demonstrated resilience a number of times this year, and Tuesday’s trading has been another case in point.
By Peter Martin
Tuesday, July 22, 2014
Geopolitical concerns have damped stock levels down in the last couple of trading sessions, but some promising earnings and a signal that inflation remains at acceptable levels has helped the S&P 500 index set a new record level today.
Despite disappointing results from Dow components Coca-Cola, DuPont, McDonald’s and Coca-Cola, strong results elsewhere, including Comcast, Verizon and Chipotle, helped propel the leading benchmarks higher. By mid-afternoon in New York, the Dow Jones Industrial Average was up 0.39% or 65 points at 17,117, while the S&P 500 rose 0.58% to 1985.0, after hitting an all-time high of 1986.24 earlier in the day. Around three quarters of the S&P 500 companies that have reported so far have beaten earnings estimates. Apple and Microsoft are among the companies reporting after the closing bell tonight.
Inflation has been warming up in recent months, to the extent that concerns were brewing that Fed Chief Janet Yellen might soon find her hand forced to take action and stave off further rises by tightening monetary policy. Those concerns will have eased after today’s release of the latest consumer price index. The CPI rose 0.3% at the headline level in June, a slightly lower pace than the 0.4% month-on-month change seen in May. Year-on-year the change remained constant at 2.1%.
This is still perhaps a little too high to wash away all concern at the Fed, but a notable easing in the core rate, which excludes the more volatile components of food and energy, will provide doves with at least some ammunition to fight their corner. The core rate rose just 0.1% in June, undershooting expectations which had pointed to a 0.2% increase, and a much cooler rate of change than the 0.3% jump seen in the month prior.
For the time being at least, therefore, there is little to suggest inflation is running away from the Fed, and an annual rate around 2% is precisely what the Fed wants. Any persistent pick up in the rate of inflation would start to put the Fed under pressure to tighten, though, which is really the opposite problem facing the ECB, which continues to struggle with downside risks to inflation.
It is this divergence in policy, where the ECB has recently introduced fresh stimulus measures and could still be weighing up more, while the Fed is on a countdown to the end of stimulus and could be weighing up when to tighten, that has been driving a big change in the exchange rate of the euro against the dollar today. EUR/USD has dropped 0.42% today to 1.3466, diving down as low as 1.3459 earlier in the session, the weakest the euro has been against the dollar in eight months.
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