U.S. stock markets generally rebounded on Friday. Despite the latest inflation data exceeding expectations and market bets on the Federal Reserve's interest rate hike next week increasing significantly, a sudden drop in oil prices and a pullback in long-term U.S. Treasury yields from high levels alleviated investors' dual pressures regarding valuations and inflation.
The three major stock indices have collectively rebounded.
The S&P 500 index rose by about 0.9% to 1%, the Nasdaq Composite Index rose by about 1%, and the Dow Jones Industrial Average gained about 500 points, recovering some of the losses from this week. At the beginning of trading, all 11 sectors of the S&P 500 rose simultaneously, indicating a wide range of buying interest.
The day before, rising oil prices and relatively strong producer inflation had dampened market risk appetite. However, on Friday, the trading logic reversed; falling energy prices and cooling long-term interest rates became the main factors driving the stock market rebound.
Inflation remains high, yet it has not prevented a rebound.
Data shows that consumer inflation in the United States rose by 0.4% month-on-month and 3.4% year-on-year in August. Following the release of the data, traders quickly raised their expectations for the Federal Reserve to raise interest rates by 25 basis points next week, with the probability increasing from around 67% to around 85%.
Normally, higher inflation and stronger expectations of interest rate hikes would put pressure on the stock market. However, this time, the market is more concerned about changes in the structure of inflation. Reports mention that the core CPI has slowed down to 2.4% year-on-year, while most of the overall inflationary pressure comes from energy prices.
This leads some investors to believe that even if a rate hike occurs in September, it does not necessarily mean that a new round of continuous tightening has begun, provided that oil prices do not continue to rise rapidly in the future.
Oil prices and long-term bond yields decline in tandem
Brent crude oil once rose to $109.97 per barrel during the session, before falling back to around $104, with a daily decline of over 3%. WTI Crude oil also fell back below $100 per barrel. Reports indicate that foreign ministers from several Middle Eastern countries are discussing reaching a temporary arrangement with Iran to manage shipping through the Strait of Hormuz, and this news has pressured oil prices.
Meanwhile, the yield on 10-year U.S. Treasury bonds rose to 4.9915%, reaching a high in nearly three years, before falling back to around 4.94%; the yield on 30-year U.S. Treasury bonds briefly touched 5.424%, the highest level in 19 years, before dropping to around 5.32%.
However, market pressures have not completely eased. The yield on 10-year U.S. Treasury bonds remains close to the 5% mark, and the yield on 30-year bonds also stays above 5%. For the U.S. stock market, high long-term interest rates remain a major constraint on valuations. Whether the rebound seen on Friday can continue will still depend on the performance of oil prices and the bond market in the coming days.
