​​​​​​​Strong Retail Sales Boost US Stocks While ECB Takes Historic Rate Action | Daily Market Analysis

Key events:  

• USA - Export Price Index (MoM) (Aug)  
• USA - Import Price Index (MoM) (Aug)  
• USA - NY Empire State Manufacturing Index (Sep)
• USA - Industrial Production (MoM) (Aug)
• USA - Michigan Consumer Sentiment (Sep)

On Thursday, US stocks surged as robust retail sales figures defied expectations of a weaker economy, despite a hotter-than-anticipated inflation report.

The Dow Jones Industrial Average climbed by 331 points or 0.9%, while the S&P 500 and NASDAQ Composite both posted gains of 0.8%.

A day earlier, the three primary Wall Street indices had lost momentum as they grappled with the August consumer price report. This data revealed that US consumer prices experienced their most substantial increase in 14 months, driven by rising gasoline costs. However, the annual uptick in underlying inflation was the smallest in nearly two years.

Looking ahead, the US central bank is still expected to maintain borrowing costs within the range of 5.25% to 5.50% during its upcoming meeting later this month, as indicated by CME's FedWatch Tool. Nevertheless, the unexpected rise in the headline inflation rate contradicted previous, cooler-than-expected readings, casting uncertainty on whether Federal Reserve officials will consider another rate hike in either November or December.

Yesterday, fresh inflation data emerged. The producer price index for August exceeded expectations, rising by 1.6% on an annualized basis compared to the anticipated 1.2%. It also saw a 0.7% increase from July, surpassing the expected 0.4% gain.

In addition to this, retail sales for the prior month surged by 0.6%, outpacing the estimated 0.2% increase, while the number of Americans filing for unemployment benefits last week remained low at 220,000, falling short of expectations.

The European Central Bank has raised interest rates to a historic peak in response to persistent inflation concerns in the eurozone, even as indications of economic slowdown emerge in the region.

This marks the tenth consecutive interest rate hike by the Frankfurt-based institution, following a perception that it had initially underestimated the pace of price increases early last year. Consequently, the ECB has elevated its key interest rates, including those for main refinancing operations, the marginal lending facility, and the deposit facility, to 4.50%, 4.75%, and 4.00%, respectively.

However, the ECB has hinted that this recent rate increase is likely to be its last for the foreseeable future. They emphasized that these rates, if maintained for a sufficiently extended period, will significantly contribute to curbing inflation.

For two consecutive days, gold's value came close to testing the $1,900 support level. In both instances, it managed to remain above this threshold as buyers intervened to prevent it from falling into the $1,800 range.

Gold faced this recent challenge as the Dollar Index reached a one-week high, pushing it back above the 105 mark. The euro has been depreciating against the dollar since July, partly due to the Federal Reserve's decision to maintain high interest rates for an extended period.

Additionally, the ongoing conflict in Ukraine has adversely affected the euro, disrupting trade and creating global economic uncertainty. The euro's fortunes may improve if the European economy strengthens or the US economy faces weakness.

Market reactions to the somewhat pessimistic macroeconomic outlook include the DAX index falling below its 100-day moving average and the yield on six-month German bunds rising above 3.7%.

In Friday's trading session, investors will keep a close eye on several key economic indicators, including data on import and export price indices, the NY Empire State manufacturing index, industrial production figures, and the preliminary Michigan consumer sentiment.