Market Wrap US-Europe 12 August: Nasdaq Climbs 0.5 Percent as US Inflation Eases to 3.4 Percent

By The Edge Research Team

Wall Street rose on Wednesday after a softer than expected inflation report, with the Nasdaq Composite up 0.54 percent at 26,588.49 and the S&P 500 up 0.26 percent at 7,748.50, while the Dow Jones was the outlier and slipped 0.04 percent to 53,770.27, per CNBC. Europe traded for about three hours after the release and still finished lower across all four benchmarks.

The inflation report set the backdrop. The Labor Department reported that consumer prices rose 0.1 percent in July and 3.4 percent over the year, easing from 3.5 percent in the 12 months to June, while core inflation excluding food and energy rose 0.2 percent on the month and eased to 2.5 percent from 2.6 percent over the year. The monthly detail is what makes the annual figures readable: the energy index fell 1.5 percent in July after falling 5.7 percent in June, and gasoline fell 2.9 percent, even though both remain far higher than a year ago at 14.7 percent and 24.6 percent. Shelter, the largest single component, rose 0.1 percent on the month and 3.2 percent over the year, and food rose 0.1 percent. The breadth of the equity move was wider than the three headline indices suggest, with the Russell 2000 up 0.67 percent at 3,047.48, ahead of both the S&P 500 and the Dow.

Europe closed lower in all four markets after spending the morning higher. The CAC 40 fell 0.46 percent to 8,674.94, the Euro Stoxx 50 0.26 percent to 6,533.99, the DAX 0.23 percent to 26,331.07 and the FTSE 100 0.10 percent to 10,833.15. The timing is worth stating precisely: the US inflation report landed at 8:30 in the morning New York time, which is half past two in the afternoon in Frankfurt, so European markets had roughly three hours of trading after it. The DAX was up about half a percent shortly after the release, as we reported in our MENA-Asia wrap, and gave that up through the afternoon. Whether the data drove the reversal is not something this session establishes.

In commodities, crude eased and gold extended. Brent traded at 88.66 dollars a barrel, down 0.28 percent, and West Texas Intermediate at 83.00 dollars, down 0.24 percent, a pullback after Tuesday’s advance, when Brent settled 1.35 percent higher on Iran’s conditions for reopening the Strait of Hormuz. Gold for December delivery was quoted at 4,473.00 dollars an ounce, up 0.72 percent, having settled at 4,467.80 in the session covered in our commodities wrap.

In currencies and crypto, the dollar firmed despite the softer inflation print. The euro eased 0.15 percent to 1.1523 dollars and sterling 0.11 percent to 1.3489, while the dollar added 0.13 percent against the yen to 159.48. The Kuwaiti dinar was steady with the dollar at 0.3072 dinars, and the Egyptian pound held at 50.17. Bitcoin was effectively unchanged, up 0.09 percent at 63,413.45 dollars. The 10-year Treasury yield ended the day essentially where it started, at 4.686 percent, while the volatility index fell 5.69 percent to 14.41.

For reference, Wednesday’s closes from our MENA-Asia wrap showed Asia leading and the Gulf narrowly firmer, with South Korea’s Kospi up 3.68 percent by far the largest move across either region, Egypt’s EGX30 up 0.38 percent, and Hong Kong’s Hang Seng down 0.83 percent the weakest.

Table – US equities, 12 August close, ranked by change:

Table – Europe equities, 12 August close, ranked by change:

Table – MENA and Asia, Wednesday 12 August closes, for reference, ranked by change:

Table – Commodities, intraday 12 August, ranked by change:

Table – Currencies, rates, volatility and crypto, intraday 12 August, ranked by percent change:

Why it matters: The equity reaction was smaller than the wait suggested, and the bond market barely moved at all. A 10-year yield essentially unchanged after a report showing both headline and core inflation easing a tenth is a market that had already priced this outcome, our reading. The more informative number is the volatility index at 14.41, down 5.69 percent and the lowest of this run, which prices the removal of an event rather than a change in the outlook. The composition of the report is where the useful detail sits. Energy is still 14.7 percent higher than a year ago and gasoline 24.6 percent, but both fell over the month, energy by 1.5 percent and gasoline by 2.9 percent. So the annual rate eased partly because fuel gave ground in July, not in spite of it, and the core rate at 2.5 percent remains the cleaner read on underlying pressure with shelter at 3.2 percent over the year and just 0.1 percent on the month. The Russell 2000 outperforming both the S&P 500 and the Dow fits that reading, since smaller companies carry more floating-rate debt and gain most from a lower expected path for rates.

Outlook: With July’s inflation print out of the way, attention moves to the Federal Reserve’s September decision, and the question is whether one softer month is enough to shift it. Volatility at 14.41 leaves very little room to fall further and historically says more about positioning than direction. In Europe, the reversal from a firmer morning to a lower close on all four benchmarks is the thing to watch on Thursday, since European markets have now had a full session and an overnight to weigh the US reaction. In commodities, crude giving back part of Tuesday’s advance while the Strait of Hormuz stays shut is the tension to follow, and gold above 4,470 dollars has risen alongside falling volatility, which is not the usual pairing.

Sources: CNBC; US Bureau of Labor Statistics.

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