US stocks, bonds rise as tame CPI curbs Fed-hike bets

New business data points to the fact that An in-line inflation reading spurred upside in both stocks and bonds, easing concern around imminent The US central bank interest-rate increases despite elevated crude prices.

The data brought relief to Wall Street traders worried around ongoing geopolitical risks, with the S&P 500 hovering near all-time highs. A surge in giant chipmakers additionally helped sentiment, driving the Nasdaq 100 up around 1%. Treasury two-year yields declined four basis points to 4.17%. Money markets trimmed bets on a September Fed hike.

The consumer price index, excluding often-volatile food and energy categories, increased 0.2% in July from a month earlier. On an annual basis, it advanced 2.5%, matching the slowest pace since March 2021. Overall, inflation rose 0.1% from the prior month and 3.4% from a year earlier.

In the wake of Friday’s weak July jobs report, the moderation in price expansion may help alleviate some of the inflation anxiety at the Fed after three officials dissented on July 29 in favor of raising interest rates.

“The big surprise with a report that had no surprises is that a situation where inflation isn’t reaccelerating, coupled with the most recent, weak jobs report gives the Fed more time to wait,” stated Chris Zaccarelli at Northlight Asset Management.

Typically, the market would be buoyed by the thought of rate cuts, but in a world where many are expecting rate hikes, anything that can delay – or squash the need for – rate hikes will be viewed positively, he further noted.

Although inflation stays elevated, today’s CPI report should give market participants greater confidence that peak inflation appears to be behind us, according to Bret Kenwell at eToro. At the same time, disappointing jobs and gross domestic product data have market participants debating how much urgency the Fed actually faces to mobilize rates, he further noted.

“Contained core inflation adds to the encouraging signs in last month’s release of a moderation in underlying inflation, helping strengthen the case for a September hold,” stated Lindsay Rosner at Goldman Sachs Asset Management.

While there will be another round of inflation data before the September Fed meeting, unless those numbers tell a much different story, officials will likely still be in a position to leave rates unchanged, noted Ellen Zentner at Morgan Stanley Wealth Management.

“Today’s CPI print, alongside July’s dip in payrolls, should softer expectations for a September hike, but does not put it completely to bed,” stated Seema Shah at Principal Asset Management. “Unless August’s inflation print additionally reveals subdued price pressures, a September hike is a clear risk.”

With the Strait of Hormuz still shut, upside inflation risks will stay top of mind for the foreseeable future, she further noted.