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U.S. stocks are expected to have their best week since Donald Trump was elected, buoyed by strong bank profits and weak underlying inflation data, raising the prospect of further interest rate cuts this year.
The blue-chip S&P 500 index rose 1% in early trading on Friday, and is expected to rise 3% this week.
That would mark the best weekly gain since a 4.7% gain in the five sessions through Nov. 8, when Trump’s election victory raised concerns that the incoming administration’s tax cuts and deregulation would boost the U.S. Hope for the corporate world. The tech-heavy Nasdaq is expected to rise 2.4%, its best weekly gain since early December.
The gains over the past week came as banks including JPMorgan Chase & Co., Goldman Sachs and Citigroup kicked off the U.S. earnings season by posting strong profit gains late last year, driven by a trading and trading boom.
Investor sentiment also benefited from data released this week by the U.S. Bureau of Labor Statistics, which showed headline annual inflation was in line with expectations, rising to 2.9% in December from 2.7% in November. Excluding volatile food and energy costs, core inflation unexpectedly fell to 3.2% from 3.3% a month ago.
Mike Zigmont, co-head of trading and research at Visdom Investment Group, said this week’s inflation data means market sentiment is once again “in a state of excitement.”
For now, “inflation is no longer a concern” [and] Good earnings and reporting bank guidance further encouraged bulls,” he added.
Signs of slowing inflation have revived investor hopes that the Fed will continue to cut interest rates in the coming months.
The release of blockbuster employment data last week has some market participants calling for an end to the central bank’s easing cycle or even a hike in interest rates to offset potential inflationary pressures in the world’s largest economy.
Stocks have also come under pressure in recent weeks due to a global bond selloff centered on the United States.
However, the decline has stalled this week, with the policy-sensitive two-year Treasury yield, which closely tracks interest rate expectations, falling to 4.26% from Monday’s recent high of 4.42%.
Over the same period, the 10-year government bond yield, a benchmark for global borrowing costs, has fallen to 4.6% from around 4.8%. As prices rise, output falls.
Florian Ielpo, head of macro at Lombard Odier Investment Managers, said: “Reduced interest rate risk and improved earnings make for a good combination to revive subdued risk appetite.”
“The second half of January could see a reversal of the initial trend: lower interest rates leading to higher stocks,” he added.
Bank of America strategist Aditya Bhave said weak December inflation data could reduce the risk of an imminent rate hike. But strong economic growth, strong consumer spending and a strong job market still mean “we maintain our view that the Fed’s rate-cutting cycle is over,” he said in a note to clients.
