The stock market moved higher on Monday, extending recent gains ahead of this week’s key inflation report, with investors hoping for more signs that high consumer prices have peaked as the Federal Reserve continues to aggressively raise interest rates.
Stocks continued to rise after falling first weekly profit for the month last Friday: The Dow Jones Industrial Average rose 0.7%, over 200 points, while the S&P 500 added 1.1% and the tech-heavy Nasdaq Composite added 1.3%.
Markets initially got a boost after a survey by the New York Federal Reserve showed that a drop in gas prices led to growing hopes that inflation is cooling, building on recent optimism after consumer prices cooled slightly in July and appeared to will happen again in August.
Investors now await the August consumer price index report on Tuesday, with economists expecting inflation to rise 8.1% from a year earlier, down slightly from 8.5% in July.
Fed officials have continued to promise in recent weeks that the central bank will keep raising interest rates– even if it will hurt economic growth – until inflation comes down significantly, which they admit is likely to “take some time”.
According to data from CME Group, traders now see a 92% chance — up from about 70% two weeks ago — that the central bank will raise rates by 75 basis points for the third straight time, following similar hikes in June and July.
Wall Street majors similarly raised their expectations for a rate hike by 75 basis points, with JPMorgan analysts saying in a recent report that they expect “further confirmation of a peak” in inflation, especially as gas prices continue to fall.
“Stocks are rising as investors expect inflation to show further signs of slowing and as Ukraine’s counteroffensive gains momentum in the east,” said Edward Moya, chief market analyst at Oanda. Ukraine’s “sudden momentum” and recent success driving Russian forces boosted optimism in markets, with many hoping for a “turning point” in the conflict, which has been ongoing since late February, he adds. While Tuesday’s inflation report “will likely show an easing of price pressures,” it won’t convince the Fed to change its “aggressive stance on monetary tightening,” Moya predicted.
What to watch out for:
Despite recent gains, the market consensus is “cautious and skeptical,” with buying likely to “flip out” after Tuesday’s CPI report, says Vital Knowledge founder Adam Crisafulli. “Developments in Ukraine are not receiving nearly enough attention,” he adds; “At the very least, it’s very optimistic about the outlook for the eurozone.”