Pause in rally on Wall Street

US share prices headed lower after six days of gains, but the S&P 500 is still on track for one of its biggest gaining weeks this year.

The Dow Jones retreated despite strong earnings from JP Morgan and Wells Fargo. Bankings stocks have been given a lift by the results from these two financial bellwethers though.

JP Morgan reported earnings of $1.60 per share, smashing estimates of $1.44, on revenue of $25.96 billion, which comfortably exceeded the $2.84 billion that had been expected.

Wells Fargo also beat expectations for earnings and revenue. We will hear from most of the other banking stocks next week, but this is a strong start and could well set the tone for the rest of the sector.

Stocks were dragged lower broadly after United Parcel Service cut its guidance for full-year earnings and warned that its second quarter will be around $1.13 per share, lower than the $1.20 that analysts had previously been expecting. UPS says it is seeing a slowdown in the US industrial economy and its clients are opting for cheaper competitors.

By mid-afternoon in New York, the Dow was down just 22 points or 0.15% at 15,438. Boeing was one of the bigger drags on the Dow, slipping more than 3% after a Dreamliner 787 caught fire at Heathrow airport.

Data before the US stock market opened showed that the Producer Price Index rose 0.8% in June, which was higher than expected, and suggests that inflation may be warming again, after appearing stagnant in previous months. This will offer some ammunition to hawks at the Fed arguing that stimulus needs to be scaled back soon.

Speaking of whom, Charles Plosser, the President of the Federal Reserve Bank of Philadelphia, told Bloomberg in an interview that he he thinks ‘we should begin to taper very soon and hopefully end it by the end of this year,’ adding that ‘I’d like to start in September’. My view is that the stimulus being completely stopped by the end of the year is very unlikely, but there is certainly a contingent at the Fed that would like to start reducing the size of the monthly purchases in September.

Regardless of Plosser’s views, so much is contingent on future data. Should inflation continue to heat up, September seems more than possible; if it remains well below target over the next few months, however, I think we would expect to see the start of tapering no earlier than the October FOMC meeting.

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