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US stocks are on track for their best week since Donald Trump’s election victory, boosted by strong bank earnings and softening core inflation data, raising the prospect of further interest rate cuts this year.
The blue-chip S&P 500 rose 1.2 percent on Friday, leaving the index poised to end the week up 3.1 percent.
That would be its best weekly gain since a 4.7 percent gain in the five sessions through Nov. 8, when Trump’s election victory stoked hopes that tax cuts and deregulation under the incoming administration would boost corporate America. The tech-heavy Nasdaq Composite should add 2.7 percent, its best weekly gain since early December.
Last week’s rebound came as banks including JPMorgan Chase, Goldman Sachs and Citigroup kicked off the US earnings season by reporting a strong rise in profits at the end of last year, boosted by a boom in trading and deal-making.
Investor sentiment was also buoyed by figures released this week by the Bureau of Labor Statistics showing that headline annual inflation rose in line with expectations to 2.9 percent in December from 2.7 percent in November. Core inflation, which excludes volatile food and energy costs, unexpectedly fell to 3.2 percent from 3.3 percent a month earlier.
This week’s inflation data meant that sentiment had once again “moved into excitement territory,” said Mike Zigmont, one of the heads of trading and research at Wisdom Investment Group.
For now, the “inflationary boogie man no longer cares [and] the good earnings and the guidelines that the banks reported further encouraged the bulls,” he added.
Signs of slowing inflation have rekindled hopes among investors that the US central bank, whose next two-day policy meeting is in late January, will continue to cut rates over the coming months.
The upbeat jobs data released last week led some market participants to call for an end to the central bank’s easing cycle or even a hike in interest rates to neutralize the potentially inflationary force of the world’s largest economy.
Stocks have also come under pressure in recent weeks due to a global bond selloff centered on the US.
The decline, however, halted this week with the yield on the policy-sensitive two-year government bond, which closely tracks interest rate expectations, falling from Monday’s recent high of 4.42 percent to 4.26 percent.
The 10-year yield — a benchmark for global borrowing costs — fell from about 4.8 percent to 4.61 percent over the same period. Yields fall as prices rise.
“Reduced interest rate risks and improved earnings make a decent combination to rejuvenate subdued risk appetite,” said Florian Ielpo, head of macro at Lombard Odier Investment Managers.
“In the second half of January, we could see a reversal of the trends that marked its beginning: lower rates lead to higher stocks,” he added.
December’s lower inflation data could reduce the risk of an inevitable increase in interest rates, according to Bank of America strategist Aditya Bhave. But resilient economic growth, strong consumer spending and a firm labor market still mean “we continue to hold our view that the Fed’s tightening cycle is over,” he said in a note to clients.
