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US stocks notched up their best week since Donald Trump’s election victory, boosted by strong bank earnings and softening underlying inflation data, which raised the chances of further interest rate cuts this year.
The blue-chip S&P 500 closed 1 per cent higher on Friday, leaving the index up 2.9 per cent for the week.
That marked its best weekly gain since a 4.7 per cent rise in the five sessions to November 8, when Trump’s election win raised hopes that tax cuts and deregulation under the incoming administration would boost corporate America. The tech-heavy Nasdaq Composite added 2.5 per cent, in its best weekly gain since early December.
The past week’s rally has come as banks including JPMorgan Chase, Goldman Sachs and Citigroup kicked off US earnings season by reporting strong increases in profits over the course of last year, powered by a boom in trading and dealmaking.
Investor sentiment has also benefited from figures released this week by the Bureau of Labor Statistics that showed headline annual inflation rose in line with expectations to 2.9 per cent in December from 2.7 per cent in November. Core inflation, which strips out volatile food and energy costs, fell unexpectedly to 3.2 per cent from 3.3 per cent a month before.
This week’s inflation data meant sentiment “flipped into excited territory” again, said Mike Zigmont, co-head of trading and research at Visdom Investment Group.
For now, “the inflation boogie man is no longer a worry [and] good earnings and guidance from the reporting banks further emboldened the bulls”, he added.
Signs of slowing inflation have reinvigorated hopes among investors that the Federal Reserve, whose next two-day policy meeting falls at the end of January, will continue lowering rates over the coming months.
Blockbuster jobs numbers released last week had left some market participants calling for an end to the central bank’s easing cycle or even a rate rise to offset the potentially inflationary strength of the world’s biggest economy.
Stocks had also come under pressure in recent weeks amid a global bond sell-off centred on the US.
The slide halted this week, however, with the policy-sensitive two-year Treasury yield, which closely tracks interest rate expectations, having declined from a recent high of 4.42 per cent on Monday to 4.27 per cent.
The 10-year yield — a benchmark for global borrowing costs — has fallen from about 4.8 per cent to 4.61 per cent over the same period. Yields fall as prices rise.
“Lowered rate risks and improved earnings form a decent mix to rejuvenate the subdued risk appetite,” said Florian Ielpo, head of macro at Lombard Odier Investment Managers.
“The second half of January might see a reversal of the trends that marked its beginning: lower rates leading to higher equities,” Ielpo added.
December’s softer inflation numbers might reduce the risk of imminent rate increases, according to Bank of America strategist Aditya Bhave. But resilient economic growth, strong consumer spending and a sturdy jobs market nonetheless mean “we maintain our view that the Fed cutting cycle is over”, he said in a note to clients.
