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By Lewis Krauskopf and David Randall
NEW YORK (Reuters) - Data on Wednesday hinted that U.S. inflation may have peaked, reassuring investors that the Federal Reserve will not feel obligated to hasten plans to rein in emergency-level support of the economy, but they remained worried that rising prices could continue to weigh on everything from bond prices to corporate margins.
Data showed on Wednesday that U.S. consumer price increases slowed in July even as they remained at a 13-year high on a yearly basis. The S&P 500 and the Dow Jones Industrial Average closed at record levels, while U.S. Treasury yields fell across most maturities.
Some investors said the data bolstered the Fed's assertion that jumps in inflation will be relatively fleeting, partly reflecting supply chain bottlenecks that will ease with time.
But they added that inflation remains elevated, which can sap profit margins and erode the value of bonds.
Other concerns: corporate earnings growth appeared to be hitting a peak; rising coronavirus cases could threaten the economy; and stocks are generally trading at historically high valuations.
The inflation data would help the Fed feel a "a little bit more confident that they can let inflation run a little bit hotter in the near term without having to worry about overshooting," said Gennadiy Goldberg, senior U.S. rate strategist at TD Securities. "Markets are reacting with a bit of relief, which I think makes a lot of sense," Goldberg added. The Fed has dropped interest rates to rock-bottom levels and is currently making $120 billion in monthly bond purchases, as it has aimed to spur spending and borrowing. The question of when and at what pace it expects to taper those purchases looms large over markets.
"The concern has been how soon and how quickly will the Fed begin to taper its bond purchases and this lends some credence to the argument that the inflation pressures we are seeing are transitory,” Jim Baird, chief investment officer at Plante Moran Financial Advisors, said after the inflation data.
In a research note, Morgan Stanley economists said Wednesday’s CPI data “supports the view that the last few months likely marked the peak rates of inflation.”
PEAK EVERYTHING?
A peak in inflation rates would coincide with an expected peak in earnings growth for the second quarter. As of Friday, with over 440 companies reported, S&P 500 second-quarter earnings are expected to have climbed 93.1%, according to Refinitiv IBES data.
Steep increases in inflation and earnings growth "are telling you the same thing, which is a year ago things were really dire and this year things are rebounding," said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute in St. Louis.