The stock market moved higher on Monday, extending recent gains ahead of a key inflation report this week, with investors hoping for more signs that high consumer prices have peaked as the Federal Reserve continues to aggressively hike interest rates.
Stocks continued to rally after notching their first weekly gain in a month last Friday: The Dow Jones Industrial Average rose 0.7%, over 200 points, while the S&P 500 gained 1.1% and the tech-heavy Nasdaq Composite 1.3%.
Markets initially got a boost after a survey from the New York Federal Reserve showed that a decline in gas prices is leading to rising hopes that inflation is cooling, building on recent optimism after consumer prices cooled slightly in July and look set to do so again in August.
Investors are now looking ahead to the August consumer price index report on Tuesday, with economists expecting inflation to rise 8.1% compared to a year ago, which would be a slight decline from 8.5% in July.
Fed officials have continued to pledge in recent weeks that the central bank will keep raising interest rates—even if it hurts economic growth—until there is a meaningful decline in inflation, which they admit will likely “take some time.”
Traders now see a 92% chance—up from around 70% two weeks ago—that the central bank will raise rates by 75 basis points for a third consecutive time, following similar hikes in June and July, according to CME Group data.
Major Wall Street firms have similarly raised their expectations for a 75-basis-point rate hike, with JPMorgan analysts saying in a recent note that they expect “further confirmation of a peak” in inflation, especially as gas prices continue to fall.
“Stocks are rising as investors anticipate inflation to show even further signs of slowing and as Ukraine’s counteroffensive gains momentum in the East,” says Edward Moya, senior market analyst at Oanda. Ukraine’s “sudden momentum” and recent success driving back Russian forces has boosted optimism in markets, with many hoping for a “turning point” in the conflict, which has been ongoing since late February, he adds. While Tuesday’s inflation report “will likely show pricing pressure relief,” that won’t convince the Fed to alter its “aggressive stance of tightening monetary policy,” Moya predicts.
What To Watch For:
Despite recent gains, the consensus viewpoint in markets is “cautious and skeptical,” with buying likely to “peter out” after Tuesday’s consumer price index report, says Vital Knowledge founder Adam Crisafulli. “The developments in Ukraine aren’t receiving nearly enough attention,” he adds; “At the least, this is very bullish for the Eurozone outlook.”