Stocks Surging on Better-Than-Expected Inflation Data

The stock market is recovering swiftly as the infaltion rate finally falls. Meanwhile, trouble is brewing for the housing market, and Ethereum is trying to stage a comeback.

Stocks opened higher Thursday morning as the three major indexes built on their unexpected surges from Wednesday. Recent economic reports show that the unprecedented inflation rate finally slowed down in July, perhaps owing to the Federal Reserve’s aggressive quantitative tightening policies. Investors are optimistic that this means the Fed won’t need to be as forceful with its interest rate hikes going forward.

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The Fed has stated that it would need to see several consistent months of economic recovery and reduced inflation before it considered reversing its current financial policies. After all, raging inflation is devastating for the economy, and a single month isn’t enough data to suggest a trend. It’s theoretically possible for inflation to jump again in August and set the Fed back to its initial plan.

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“Producer prices registered an encouraging deceleration in July as energy prices lost steam and core input price pressures moderated after ramping up in June,” explains Oxford Economics’ Mahir Rasheed. “In annual terms, headline PPI inflation cooled 1.5 percentage points to 9.8%, the slowest pace since October, while core PPI inflation eased 0.6 percentage points to 5.8%, the slowest pace since June 2021.”

Stock Market Jumps

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The Dow Jones jumped an impressive 1% points on Thursday morning, with investors eager to capitalize on a signal that the economy might be going back to normal. Likewise, the S&P 500 rose 1.1% to start the day, and the tech-heavy Nasdaq Composite added 1.3%. “The trend is our friend here. The markets will appreciate this as one step forward in the right direction for inflation, yesterday and today,” Mona Mahajan, Edwards Jones’ senior investment strategist, told reporters.

“For markets, we really can’t fight the momentum we’ve been seeing in the near term,” Mahajan continued. However, she tempered her optimism, noting that the Federal Reserve’s rate hikes could pour cold water on investors’ current enthusiasm. One troubling issue in the economy is the possibility of demand staying high due to strong stock performance. This could cause a “rubber band” effect in inflation, with the sudden increase in investor confidence adding too much demand back to the equation and tanking the value of the dollar again.

That’s why the task of bringing inflation down is so tricky for a central bank. On the one hand, the Fed wants to have a “soft landing,” ending inflation without devastating the labor market. On the other hand, it’s extremely difficult to do that without investors getting bullish and pouring money back into the economy, essentially erasing the progress made on inflation. 

Mortgage Rates Back Over 5%

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Another specter looms over the economy: mortgage rates. When the Federal Reserve hikes interest rates, it makes things tougher for potential homeowners, who are some of the most active borrowers in the US economy. This week, the rate for a 30-year fixed rate mortgage jumped back above 5% again–still under the eye-watering 5.89% seen in June, but a full two percentage points higher than the start of the year.

“The 30-year fixed-rate went back up to well over 5% this week, a reminder that recent volatility remains persistent,” explains Sam Khater, the Chief Economist for Freddie Mac. “Declines in purchase demand continue to diminish while supply remains fairly tight across most markets. The consequence is that house prices likely will continue to rise, but at a slower pace for the rest of the summer.”

Trouble in the housing market makes investors with long memories nervous. In 2008, the subprime mortgage lending crisis led to a devastating recession that slowed the economy for years, leading to several high-profile bank bailouts and widespread layoffs in the US. While the US economy is different than it was 14 years ago, the housing market is something worth watching in the second half of the year.

Ether Hits Two-Month High

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Cryptocurrencies like Bitcoin and Ether have had a rough year. The industry is in the midst of one of the worst “crypto winters” on record, which has crushed most institutional interest in the space. Thankfully for Ether bulls, the second-most-popular cryptocurrency is staging a small rally of its own. The popular token is on the verge of its latest protocol update, which has enthusiasts buzzing with excitement.

The rally on Thursday saw Ethereum’s value shoot back above $1,900 per token, its highest value in two months. This comes ahead of a planned “merge” event scheduled to take place in September. “The purpose of why you buy bitcoin, from a mindset perspective, and what you actually want to do with that is fundamentally different than when you use Ethereum,” says Boston Consulting Group’s managing director of BCG Platinion, Kaj Burchardi.

“Ethereum … is not a use case. It’s providing possibilities [for] implementing really good use cases like NFTs [nonfungible tokens] and banking products on a platform. Bitcoin is a use case.”

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