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North American markets surge as new data shows inflation may have already peaked

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The Bay Street financial district is shown with the Canadian flag in Toronto on Friday, August 5, 2022. THE CANADIAN PRESS/Nathan Denette

Canada's main stock index made triple-digit gains Wednesday while U.S. markets also surged on the release of new data suggesting U.S. inflation may have finally peaked.

The latest Consumer Price Index report from the U.S. Department of Labour Statistics came as a positive surprise to investors when it was released Wednesday morning. The report showed inflation in that country slowed to 8.5 per cent at the consumer level in July from 9.1 per cent in June.

Stocks immediately jumped on the news. Inflation has been the biggest economic challenge affecting markets in 2022, and the suggestion that it may be beginning to cool was interpreted as very positive news.

The S&P/TSX composite index closed up 307.64 points at 19,885.94.

In New York, the Dow Jones industrial average was up 535.10 points at 33,309.51. The S&P 500 index was up 87.77 points at 4,210.24, while the Nasdaq composite was up 360.88 points at 12,854.81.

Tech stocks, cryptocurrencies and other riskier investments that have been hard-hit in recent weeks benefited the most from Wednesday's surge in investor optimism. The S&P/TSX capped information technology index was up 4.2 per cent by day's end, making it the best-performing Canadian sector Wednesday.

Lesley Marks, chief investment officer with Mackenzie Investments, said the CPI report is confirmation that the overheated U.S. economy has started to slow. She said the report gave investors hope that future interest rate hikes by the U.S. Federal Reserve and other central banks around the world will not need to be as severe as feared.

"The market is reacting because it thinks this will give central bankers the ability to take their foot off the brake (of the economy) if you will, or not increase rates at the same pace they have over the last few months," Marks said.

Marks cautioned that 8.5 per cent inflation is still very high. She said while Wednesday's evidence of a cooling trend makes it more likely that the Federal Reserve will announce a 50-basis-point hike at its Sept. 21 meeting, rather than a previously anticipated 75-basis-point hike, she's not willing to rule out the higher rate increase.

“We’re not out of the woods yet, because central bankers are generally targeting around the two per cent inflation rate, and this is well above that," Marks said. "So directionally, this is positive, but we have more work to do here to bring prices down.”

In Canada, the latest inflation numbers are set to be released next week. Marks said she expects the report will show inflation as also having peaked in this country, and hopefully also influence the Bank of Canada to slow down its own pace of interest rate hikes.

But she cautioned that other metrics such as the performance of the housing market will also be factors as central bankers mull a path forward. Employment data, in particular, could have an impact as unemployment remains very low and labour shortages are still a problem for many businesses.

Marks pointed out that while prices for bonds soared immediately after the inflation report’s release, pulling their yields lower, that trend reversed itself later in the day and those decreasing yields evaporated.

She said that means bond markets are still fearful that central banks may not be able to curb inflation without tipping the economy into full-scale recession.

“That is a very different perspective than we saw on the equities side, where the view is that it’s all clear,” Marks said.

The Canadian dollar traded for 78.19 cents US compared with 77.64 cents US on Tuesday.

The September crude contract was down US$1.43 at US$91.93 per barrel and the September natural gas contract was up 37 cents at US$8.20.

The December gold contract was up US$1.40 at US$1,813.70 an ounce and the September copper contract was up six cents at US$3.65 a pound.

This report by The Canadian Press was first published Aug. 10, 2022.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD=X)

Amanda Stephenson, The Canadian Press