Big tech and oil companies' profits extend Wall Street's midsummer rebound

Investors cheered positive corporate news amid increased labour costs and other indicators of inflation

Energy giants Exxon Mobil and Chevron posted record revenue on Friday, bolstered by surging crude oil and natural gas prices. Bloomberg

US stocks extended their midsummer rebound on Friday, with the dollar and some longer-term Treasury yields dipping, as Wall Street celebrated good corporate news in spite of increased labour costs and other indicators of continuing inflation.

Positive forecasts from Apple and Amazon showed resilience in giant companies to survive an economic downturn, while energy companies Exxon Mobil and Chevron posted record revenue on Friday, bolstered by surging crude oil and natural gas prices.

The Dow Jones Industrial Average rose about 1 per cent, the S&P 500 gained about 1.4 per cent and the Nasdaq Composite added nearly 2 per cent.

The S&P 500 and Nasdaq have now posted their biggest monthly percentage gains since 2020.

Still, US labour costs increased strongly in the second quarter as a tight jobs market continued to boost wage growth, which could keep inflation up.

Consumer spending, which accounts for more than two-thirds of US economic activity, also rose 1.1 per cent last month, the US Commerce Department said on Friday.

As inflation surges across major markets and central banks try to raise rates without killing off growth, riskier markets like stocks have tended to react positively to any softening in sentiment on the part of policymakers.

After Thursday's that data showed the US economy contracted in the second quarter, stocks rose as traders bet rates would rise more slowly.

Eurozone numbers on Friday, meanwhile, beat expectations, yet recession fears are mounting as energy inflation continues to bite in the face of Russia's invasion of Ukraine.

“Our view is that earnings for all equity classes likely will peak in 2022 and move lower as the economy weakens, revenue growth stalls and input costs remain elevated,” strategists with the Wells Fargo Investment Institute wrote in a note on Thursday.

The MSCI World index gained about 1.2 per cent, on course for its best month since November 2020, buoyed by broad gains across European markets, with the Stoxx Europe 600 up around 1.3 per cent.

Despite the positive end to the month for stocks, Mark Haefele, chief investment officer at UBS Global Wealth Management, said investors should proceed with caution.

“In the near term, we think the risk-reward for broad equity indexes will be muted,” he said. “Equities are pricing in a soft landing, yet the risk of a deeper slump in economic activity is elevated.”

Treasury yields at the long end drifted lower on Friday after data on labour costs and wage growth suggested inflation remains sticky and raised fears of a recession as the Federal Reserve seeks to cool the economy without sparking a sharp slowdown.

The yield on benchmark 10-year notes dipped to 2.66 per cent, from 2.681 per cent late on Thursday, while the 2-year note yield edged up to 2.89 per cent, from 2.87 per cent.

The US dollar rebounded from a three-week low in choppy trading on Friday, as the round of US economic data suggested more inflation and higher interest rates.

The dollar was last down about 0.3 per cent against a basket of its major peers, but still on course for a second month of gains.

Futures markets now predict that US interest rates will peak by December this year, rather than June 2023, and the Federal Reserve will cut interest rates by nearly 50 basis points next year to support slowing growth.

“Strong hiring and falling GDP mean an unsustainable collapse in productivity. The labour market should slow quickly, soon,” Bank of America economists Ethan Harris and Aditya Bhave wrote in a note on Friday. “The Fed is likely to respond slowly to a recession. We think market optimism about a dovish Fed pivot is premature.”

Spot gold gained about 0.4 per cent to $1,762.5 an ounce, a more than three-week high, supported by a softer dollar and bets that the Federal Reserve may cool the pace of rate rises as economic risks increase.