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Stronger Than Expected Retail Sales & Peaking Inflation

U.S. stocks closed sharply higher on Friday, 15th July 2022, after 4 days of losses, on stronger than expected retail sales data and an expectation that inflation has peaked. 

The value of overall retail purchases increased 1% in June after an upwardly revised 0.1% decline in May, the Commerce Department figures showed Friday. The figures aren’t adjusted for inflation. 

Financial stocks led the gains with Citigroup surging 13% after it reported the best second-quarter of any big bank so far. 

Comments from Atlanta Federal Reserve president, Bostic, saying he does not favour a 100 basis point July Fed rate hike also gave cause to the rally. 

But Friday’s rally still was not enough to overcome three days of selling earlier in the week, leaving the three major market indexes with weekly losses of 1.6% for the Nasdaq, 0.9% for the S&P 500, and 0.2% for the Dow. 

Here are the closing levels on Friday, 15th July 2022:- 

 Last Change %Change 
Dow Jones 31,288.26 +658.09. +2.15% 
S&P 500 3,863.16 +72.78. +1.92% 
Nasdaq Comp 11,452.42 +201.23. +1.79% 
U.S. 10Y 2.92%   
VIX 24.23 -2.17 -8.22% 

We saw strong jobs data in the week prior, and recently we have had higher than expected, 40-year high, inflation numbers. All these should point to a hawkish fed with a 75-basis point hike, almost certain, and even a small chance of a 100-basis point hike. 

What does the market do? It rallies. 

The read of the markets is probably that inflation has peaked and should moderate going forward. This translates to a less hawkish Fed.  

Also, this Bloomberg article says monthly core inflation is actually accelerating. 

Putting the article aside, the reaction from the market is that we are unlikely to experience a meltdown in markets anytime soon. In fact, it is trying to form a bottom and if it does form a bottom then the only way is up. 

Like many, I am not convinced that the inflation story is over. The rise in interest rates will create a potential for a recession in the near future. 

Fortunately for longs, the market is happy to discount these facts and position for recovery of stock prices and maybe even a reversal of the downtrend we have seen this year. 

With the markets being so volatile, it would be wise to exercise some caution. 

Source: CBOE, Bloomberg

This commentary is written by James Gomes 
James has been in the finance industry for over 30 years and most recently worked for a large U.S. bank for more than 20 years. 

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