Stocks, Bonds, Dollar Waver After US CPI Data: Markets Wrap

(Bloomberg) — Stocks, bonds and the dollar fluctuated after a key inflation report did little to alter bets the Federal Reserve will start cutting interest rates next month.

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Equities swung between gains and losses in early New York trading after the S&P 500 notched its best four-day performance in 2024. Treasury yields edged up mildly. Swap traders priced in an about 40 basis-point Fed cut in September and a total rate reduction of over 105 basis points for this year. The greenback hovered near a four-month low.

The so-called core consumer price index — which excludes food and energy costs — increased 3.2% in July from a year ago, still the slowest pace since early 2021. The monthly measure rose 0.2%, a slight pickup from June’s surprisingly low reading, Bureau of Labor Statistics figures showed Wednesday.

“It may not have been as cool as yesterday’s PPI, but today’s as-expected CPI likely won’t rock the boat,” said Chris Larkin at E*Trade from Morgan Stanley. “Now the primary question is whether the Fed will cut rates by 25 or 50 basis points next month. If most of the data over the next five weeks points to a slowing economy, the Fed may cut more aggressively.”

S&P 500 contracts were little changed. Treasury 10-year yields rose two basis points to 3.86%

Wall Street’s Reaction to CPI:

Bottom line, the pace of inflation deceleration continues but at a glacial pace. As for the Fed, I believe it will take further negative data on the labor market before the September meeting in order for them to cut 50 bps, which is very possible. Otherwise, I think It’s more likely to be 25 bps.

Bret Kenwell at eToro:

Headline CPI figures for July were in-line or slightly below economists’ expectations. Absent an unexpected spike in today’s inflation report, the path appears set for a September cut.

With the mostly in-line results, investors should feel more confident in a September rate cut. However, it’s no longer a question of “if” or “when” the Fed will cut rates, but rather, whether the Fed will cut by 25 or 50 basis points.

Real estate and utilities have been the best-performing sectors so far this month, driven by the recent speculation of lower rates. Today’s report increases confidence in lower rates and could further act as a bullish catalyst for these groups — and equities in general.

The Fed has stressed that its policy is based on a collection of data rather than a single data point. Even if today’s figures were slightly higher than expected, the Fed still could have justified a rate cut next month.

Consumer price inflation is softening and moving closer to the Federal Reserve’s target and we think the Fed cuts interest rates in September, but only by 25 basis points, as a deeper 50 basis point rate cut would cause more harm than good as the Fed would be signaling that they’re worried about the health of the economy.

The Fed wants to show a measured pace in their interest rate movements, which 25 basis point increments show. A 50 basis point rate cut would signify calamity and may actually shock the stock and bond markets. Even though there were loud calls for a deeper 50 basis point rate cut during last week’s stock market volatility, the bar is extremely high for the Fed to cut by 50 basis points.

The in-line inflation print should not prove an obstacle to the Fed commencing with interest rate policy normalization next month.

The read-through from CPI to the Fed’s preferred core PCE measure is for another month in the 0.1-0.2% range, which should help afford the Fed greater comfort that the US economy is headed toward a return to the Fed’s 2% target over time. This helps shift the balance of risks further toward the maximum employment side of the dual mandate, meaning jobs data will likely be under even greater scrutiny in the months ahead.

Following on from weaker than expected employment data, US inflation came in as anticipated for July. Whilst this will not have any effect on Fed policy it will allow for a sigh of relief from market participants. Recent volatility has largely been driven by macro news and this is a case of; dull news is good news. It also allows the Fed breathing space as they weigh the economy ahead of their next meeting.

The relay race to Fed cuts is on! Today’s CPI print of a rounded .2% cleared the way for a 25 bp cut in September while not completely shutting the door on the chance of a 50 bp cut. We saw expected declines in used car prices and airfares, as well as a modest decline in new car prices following last month’s disruptions to dealer software systems. By contrast, shelter costs were hotter than the Fed would like. This leaves us in a zone where fixed income still has income, Fed is on track to cut some amount in September, and we’ve got two more legs of this race to go—CPI and NFP.

Corporate Highlights:

UBS Group AG posted higher than expected profit in the second quarter, as investment banking revenue and progress in integrating Credit Suisse helped bolster Chief Executive Officer Sergio Ermotti’s efforts to return capital to shareholders.
Southwest Airlines Co. said it remained confident in its current leadership team after Elliott Investment Management proposed replacing a majority of directors on the struggling airline’s board in a looming proxy battle.
Alaska Air Group Inc. and Hawaiian Holdings Inc. said they will again extend closing their proposed $1.9 billion deal to give US antitrust enforcers more time to discuss a potential settlement.
Mars Inc. agreed to buy Kellanova for nearly $36 billion, bringing together two major food companies in one of the biggest deals of the year.
Blackstone Inc. is in advanced talks to buy health-care consulting firm Chartis Group from private equity firm Audax Group, according to people familiar with the matter.

Key events this week: