Inflationary pressures may finally be cooling, if only a bit. According to data disclosed by the Bureau of Labor Statistics, inflation in July rose 8.5% year over year but was flat compared with June - i.e., there was no net inflation over the last month. Expectations were that inflation was going to rise 8.7% YoY and 0.2% MoM.
Investors were given new reason to ponder whether inflation has reached its peak, and the equities market responded positively. On the day of the BLS’s announcement (August 10th), the S&P 500 closed 2.1% higher, the Nasdaq Composite gained 2.9%, and the DJIA climbed 1.6%.
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The Sun May Be Starting to Shine, But The Rain Is Not Over
The Consumer Price Index came below economists’ expectations in July, as energy prices and the price of gasoline fell 4.6% and 7.7%, respectively.
“Things are moving in the right direction,” acknowledged Jefferies’ Chief Economist Aneta Markowska. “This is the most encouraging report we’ve had in quite some time.”
Now, it’s possible the Fed might not be forced to adopt aggressively hawkish policies in order to control inflation. Significant and sustained rate hikes by the Fed were one of the market’s biggest worries. The Federal Funds interest rate remains between 2.25% and 2.5% - and though it’s expected to head higher, it may not go as much higher as worse-case prognosticators feared.
“The deceleration in the Consumer Price Index for July is likely a big relief for the Federal Reserve, especially since the Fed insisted that inflation was transitory, which was incorrect. If we continue to see declining inflation prints, the Federal Reserve may start to slow the pace of monetary tightening,” stated Nancy Davis, founder of Quadratic Capital Management.
The market has been more optimistic lately, even before this latest inflation print. The Nasdaq Composite has already gained over 20% in value since hitting its bottom on June 16th. Usually, a market is considered bullish when it recovers 20% or more from its lowest point. However, it’s still not safe to declare the bear market is over yet. The S&P 500 has regained only 14.8% since its low point in June, and even with the lower-than-expected CPI numbers, inflation pressures remain strong.
The Other Side of The Coin
As the expectations of an upcoming recession ease, there’s a new concern on the horizon: the demand for gas. According to CNBC, the International Energy Agency raised its projected global demand for oil, which could mean higher prices in the future.
“Natural gas and electricity prices have soared to new records, incentivizing gas-to-oil switching in some countries,” stated the Paris-based agency in its monthly oil report, in which it raised its outlook for 2022 demand by 380,000 barrels per day.
How Amazon Could Be Affected
Amazon is an international juggernaut, but most of its e-commerce sales are concentrated in North America. High inflation is naturally and inversely related to retail sales. Therefore, signs of price stabilization in the US is a good omen for the Seattle-based company — and its shareholders.
Oil is a different matter. Although the global demand is poised for an increase, there are multiple factors influencing the issue, such as how fast the global economy can recover and how quickly suppliers can keep up. The economic sanctions imposed over Russia’s invasion of Ukraine, and the possibility of a China-Taiwan conflict, remain pertinent.
As Amazon is a notoriously huge logistics company, its operating costs are intensified by rising gas prices. Conversely, costs ease and margins improve if gas prices fall. Therefore, investors should be watching how both inflation and fuel prices behave in order to predict the strength off Amazon’s margins for the second half of 2022.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Amazon Maven)