Global stock markets are experiencing their best week in two months, with the S&P 500 reaching its strongest level in 15 months, driven by unexpectedly positive US inflation data and a deceleration in the US job market. The consumer price index dropped to 3% in June, its lowest in two years, leading to a significant shift in expectations regarding the Federal Reserve's monetary policy. Traders now see a 46.8% probability that the Fed will keep rates steady at its September 15-16 meeting, up from 35.8% just a day prior, according to the CME Group's FedWatch tool. This sentiment has led to gains across major indices, with the STOXX 600 hitting a new record high and set for a 2.6% weekly gain, and MSCI's broadest index of world shares rising by 0.4% for a projected 2% weekly increase.
The cooling US labor market, evidenced by a sharp slowdown in June job growth and downward revisions for prior months, further reinforced the dovish sentiment. This has taken pressure off the dollar, which saw the euro rise 0.1% to $1.144 and the pound remain steady at $1.335. Gold, benefiting from reduced rate hike fears, surged 1% to over $4,160 an ounce, heading for a 1.8% weekly gain, its first since May. Brent crude oil futures also saw a modest rise of 0.45%, reaching $71.12. US futures, including the S&P 500 and Nasdaq, were up 0.3% and 1.2% respectively, even with the US market closed for Independence Day.
Despite the current optimism, some analysts express caution. JPMorgan Asset Management called the upbeat performance of risky markets "too good to be true," noting a potential disconnect between market cheer and the necessary economic slowdown to control inflation. Hugh Gimber, a global markets strategist at the firm, suggested investors take "some chips off the table." Similarly, Bob Prince, co-chief investment officer at Bridgewater Associates, believes the Fed will not cut rates as much as markets expect and is "positioned for a tightening cycle." While the decline in US inflation to 3% is positive, the impact of a rally concentrated in a few big tech stocks and the potential for a recession are areas of concern for some.
