US Consumer Price Index (inflation) data also impressed, showing the resilience of the economy amid the trade war saga.
However, the CPI did something the market hasn’t seen for almost two decades, and an inflationary overshoot is a major risk considering how much Fed easing is priced into the stock market
Dow Jones in Party Mode as Havens Recoil
Heading into the early afternoon, the Dow Jones Industrial Average had surged by 419.64 points or 1.62%, lifting the index to 26,317.35.
It was not just the Dow which was in party mode, as the relief rally was strong across the board. The S&P 500 was up over 1.65% while the Nasdaq roared 2% higher.
The story today is all about the removal of certain tariffs and the flight from overbought haven assets, as bitcoin, gold, and the Japanese yen all took a hit. The offshore Chinese yuan surged aggressively at the positive trade news, moving sharply higher (+1.2%). In the background, unrest in Hong Kong continues to rage.
Rare Consecutive 0.3% CPI Reading a Major Tail Risk for Stock Market
Despite market optimism over trade and the underlying vibrancy in the US economy, there is a significant sting in the tail emerging due to the overshoot in the CPI.
Chief Economist James Knightley at ING believes that a more hawkish Fed could spell trouble for the US stock market, and he notes that core inflation hasn’t gained 0.3% in consecutive months since 2001.
“The market is rightly focused on worrying trade and global growth signals, but inflation should not be completely ignored. If trade tensions do ease, there is significant scope for a market re-pricing of Federal Reserve rate cuts. This is the second 0.3% monthly [CPI] increase in a row, something that hasn’t happened since 2001. It perhaps provides some food for thought given that everyone is expecting the Federal Reserve to cut interest rates further in the next few months.”
Dow Stocks: Huge rally for Apple & Caterpillar
The Dow Jones was led higher by tech giant Apple, as bulls celebrated the decision by the US to suspend tariffs on their core business. Clearly, smartphones and laptops are an integral part of AAPL’s revenue stream, and thus the 4.1% bounce was unsurprising.
Caterpillar was up more than 3% primarily due to its exposure to China and global risk appetite in general.
Coca-Cola was the only noticeable laggard in the Dow 30, as the food and beverage company failed to catch any of the bullish exuberance.