U.S. stocks open at three-month highs after another optimistic inflation report

What’s driving markets

The Dow opened 200 points higher, leading the three main U.S. benchmarks to their highest levels since early May, after the July producer-price index fell 0.5% in July, compared with expectations for a 0.2% advance.

On Wednesday, a similarly cooler-than-expected reading on U.S. consumer-price growth helped send stocks soaring, with the Nasdaq exiting bear-market territory and the Dow exiting correction territory.

See: U.S. producer price inflation moderates in July

Hopes that the peak in inflation is already behind us have helped encourage investors to pile back into equities based on the view that softening inflation could allow the Federal Reserve to hike interest rates less aggressively.

However, some market strategists are urging caution as rising housing costs could keep core inflation elevated, even as a drop in oil prices, and the prices of other commodities, have helped to weigh on inflation expectations.

See: Don’t be fooled by a drop in U.S. headline inflation. Markets will be attuned to another figure on Wednesday

“Our view is that this is a rally that really deserves a lot of scrutiny because when we think about what has happened since the mid-June low, the market outlook hasn’t really changed,” said Jake Jolly, senior investment strategist at BNY Mellon Investment Management.

“Historically, the Fed delivers more hikes than the market anticipates. And this is clearly a hiking cycle that is far from over,” Jolly said.

Also supporting the upbeat tone was a well-received earnings report from Walt Disney
DIS,
+7.76%,
which helped the media group’s shares rise 8%.

Overall, the second quarter earnings season has helped underpin the market. With companies representing 91% of S&P 500 market capitalization having reported, sales growth has been 15.1% and earnings growth 7.9% – surprising by plus 3.5% and plus 3.6%, according to Evercore ISI.

However, the latest surge in stocks may have left the market overextended and vulnerable to a pullback. The CBOE Vix index
VIX,
+1.11%,
an options-based gauge of expected S&P 500 volatility, has dipped below its long-run average of 20, suggesting traders may be getting a tad complacent.

In addition, the S&P 500’s 14-day relative strength index, a closely watched momentum gauge, is around 74, where any reading above 70 is considered overbought territory. The RSI for market behemoth Apple
AAPL,
+0.87%
is 76, the highest since December.

Companies in focus

• Shares of GSK PLC
  GSK,
  -8.24%,
  Haleon PLC
  HLN,
  -6.76%
  and Sanofi
  SAN,
  -5.14%
  tumbled amid controversy surrounding serious side effects caused by the heartburn drug Zantac.

• Six Flags Entertainment Corp.
  SIX,
  -21.81%
  shares were down more than 20% after the company released disappointing earnings.

• Canada Goose Holdings Inc.
  GOOS,
  +5.90%
  shares climbed more than 6% after the company reported higher than expected revenue, which offset a larger-than-expected loss.

How are other assets faring

• Oil was seeing modest gains, with West Texas Intermediate crude for August delivery up $1.15, or 1.3%, to $93.08 a barrel.

• The 10-year Treasury yield
  TMUBMUSD10Y,
  2.799%
  fell 1.2 basis points to 2.777%.

• The ICE Dollar index
  DXY,
  -0.47%
  fell 0.4% as traders priced in a less aggressive Fed. But a softer buck did not help gold
  GC00,
  -0.02%,
  which was marginally lower.

• Bitcoin
  BTCUSD,
  +4.08%
  advanced 2.3% to $24,410.

• Asia markets mostly got a lift from Wall Street’s overnight surge with Hong Kong’s Hang Sang
  HSI,
  +2.40%
  adding 2.2%, though Japan missed out because of the Mountain Day holiday. In Europe the Stoxx 600
  SXXP,
  +0.07%
  was roughly flat.