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Markets Rise as Inflation Data Comes in Better than Expected

Friday, August 12, 2022 04:52 PM | Neal Farmer
Markets Rise as Inflation Data Comes in Better than Expected

Markets rose this week, despite a rough start on Monday and Tuesday, as the S&P 500 finished 3.26% higher. The biggest news to start the week was the Inflation Reduction Act passing through the Senate on Sunday as it now awaits to be voted on by the House of Representatives where it is expected to pass.

Inflation Reduction Act

The roughly $700 billion bill focuses largely on healthcare and energy initiatives in addition to a minimum 15% tax on corporate profits from firms that earn at least $1 billion per year. $369 billion is going into renewable energy investments as the government looks to lower carbon emissions roughly 40% by 2030 through wind and solar projects. The bill also extends tax credits for the purchase of new and used electric vehicles.

Meanwhile, the legislation would also allow the government to negotiate drug prices for Medicare recipients. The list of eligible drugs will remain very small early on with new medications not being negotiated until 9 to 13 years after release. The bill also extends healthcare insurance subsidies under Obamacare which were originally introduced in response to the coronavirus pandemic and were set to expire at the end of the year. $64 billion will go to tax credits for consumers who purchase health insurance on internet exchanges such as Healthcare.gov.

Overall the Inflation Reduction Act looks to tackle inflation by lowering energy and healthcare costs for people while also collecting taxes from large firms that pay very little in taxes. It’s hard to imagine an increase in costs for big firms pushing them to somehow lower prices instead of raising them. Additionally, any impact on drug prices from the government being able to negotiate for Medicare recipients is going to be extremely small and effect only those who are under its coverage for the drugs available. Finally, subsidizing cleaner energy costs seems like it would have minimal impact when most still use traditional energy sources.

Economic Data and Earnings

Inflation remained a focal point with new economic data this week as consumer and producer prices came in below estimates, finally. The Consumer Price Index (CPI) stayed flat last month following a 1.3% rise in June, economists had expected prices to rise 0.2%. However, core prices (excluding food and energy) jumped 0.3% in July. Meanwhile, the Producer Price Index (PPI) showed a 0.5% drop in producer prices last month with core prices again rising 0.2%.

The overall numbers were heavily skewed by the major drop in energy prices as consumer energy prices fell 4.6% and producer energy prices 9.0%. The better than expected prices has investors questioning whether the Fed will continue on its current policy path. Rates are still expected to continue increasing as prices remain far higher year-over-year but could see smaller basis point jumps if the central bank doesn’t have to play catch-up anymore.

Lastly, earnings season rolled on with a number of large corporations reporting results this week including the likes of Disney (DIS), Cardinal Health (CAH), Fox Corporation (FOXA), Sysco (SYY), American International (AIG), and Tyson Foods (TSN). Disney in particular saw its shares surge after surpassing earnings and revenue estimates with a large boost from theme park performance and reporting strong subscriber growth from its streaming service.

All in all, the S&P 500 rose 3.26%, the Dow Jones Industrial Average gained 2.92%, and the NASDAQ increased 3.08%.

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