Equities in the US continue to edge higher, logging their third straight week of gains. The impressive run that started in the year’s first half is supported by expectations that the US is on course to avoid the much-touted recession. Investors have been cheering and adding up long positions on data showing that inflation is slowly cooling, having dropped to 3% and on course to the recommended 2% threshold.
Improving economic Conditions
With inflation edging lower, the prospects of further interest rate hikes are cooling down in the aftermath of the US Federal Reserve hiking to the 5.25% level. Higher interest rates are a negative to the equity markets as they fuel an increase in borrowing costs, making it difficult for businesses and companies to secure cheap capital.
Stronger-than-expected GDP and a better-than-expected earnings season signal that the economy is doing much better than initially feared. Therefore, the demand for risk has increased significantly in the markets.
While the Dow Jones Industrial Average has underperformed, it is still up by about 6% year to date. On the hand, the S&P 500 has bounced back from near the bear territory at the end of last year, rallying by nearly 18% year to date. The Nasdaq 100 has stood out owing to its strong exposure to tech plays rallying by about 40% year to date.
The US equity market looks set to continue edging higher amid expectations that the FED will go slowly on rate hikes and probably resort to cuts later in the year. The prospect of the US avoiding recession should also strengthen investors’ sentiments in the market.
Meanwhile, the Japanese yen remains under pressure in the currency market after the Bank of Japan announced greater flexibility in its policy. The announcement surprised the market as it affirmed a push by the central bank to loosen its yield curve control, a move expected to have serious ramifications.
Given that the central bank has been dovish over the years, introducing flexibility into its strict yield control raises the prospect of a substantial monetary policy change. Under the yield curve control plan, the central bank targets a 0% yield on the 10-year government bond to stimulate the economy with lower interest rates.