(Bloomberg) -- Stocks rose after an in-line US inflation report did little to alter bets the Federal Reserve will start cutting rates in September.
The S&P 500 extended its advance into a fifth straight day, the longest winning streak in more than month. Most of its major groups gained, with financial, energy and tech shares leading the charge. Treasuries saw small moves. The dollar remained at a four-month low.
The consumer price index reinforced the trend of disinflation and brought a degree of relief to markets still reeling after last week’s meltdown. Combined with a softening job market, the Fed is widely expected to start lowering rates next month, while the size of the cut will likely be determined by incoming data.
“It may not have been as cool as yesterday’s PPI, but today’s as-expected CPI likely will not 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.”
At Evercore, Krishna Guha said the CPI was not perfect, but it was good enough as it was consistent with a tame read on the Fed’s preferred inflation measure. In addition, the central bank has disavowed data-point dependence, and is looking at the wider outlook and balance of risks.
“This is now a labor data-first Fed, not an inflation data-first Fed, and the incoming labor data will determine how aggressively the Fed pulls forward rate cuts,” Guha noted.
The S&P 500 hovered near 5,455. Megacaps were mixed, with Nvidia Corp. up and Alphabet Inc. down. Wall Street’s “fear gauge” - the VIX - continued to subside, dropping to around 16. That’s after an unprecedented spike that took the gauge above 65 last week.
Treasury 10-year yields fell one basis point to 3.83%. Swap traders are pricing in less than 35 basis points of Fed easing in September.
At Nationwide, Mark Hackett says “calming macro fears” are among the factor providing an improved backdrop for equities. The stress of the market decline is a “fading memory,” he noted.
The latest consumer price report checks the box for the Fed to start cutting rates in September, according to TD Securities’ strategists led by Oscar Munoz and Gennadiy Goldberg.
“Today’s CPI report is again unambiguously welcome news for the Federal Reserve,” they said. “As risks have become truly two-sided for the U.S. economy, if not slightly tilted toward downward employment outcomes, we expect the Fed’s upcoming decision to come down to the magnitude of the first rate cut.”
To Chris Zaccarelli at Independent Advisor Alliance, the July CPI print is the ultimate “no news, is good news” because the markets have been on edge and the Fed is looking to cut interest rates — and nothing in this report should deter them from doing so.
At Principal Asset Management, Seema Shah says the CPI print removes any lingering inflation obstacles that may have been preventing the Fed from starting the rate cutting cycle in September. Yet, the number also suggests limited urgency for a 50 basis-point cut.
“It offers little new information to guide the future decisions of the Fed, aside from potentially supporting a rate cut due to job market concerns,” according to Florian Ielpo at Lombard Odier Investment Managers.
“The soft CPI report will likely give Fed officials modestly more confidence that inflation is on the way down,” said Anna Wong and Stuart Paul at Bloomberg Economics. “Even though July’s core PCE inflation print won’t be as good, we expect the Fed to cut rates in September due to the rising unemployment rate.”
Traders are still pricing in just over 1 percentage point worth of rate reductions in 2024, with three Fed policy meetings remaining this year. In recent sessions, market pricing had shown a split on the outcome of either 25 or 50 basis points worth of rate reductions next month.
“The inflation data has been good enough to allow the Fed to start cutting rates in September, but does not give them a reason to cut aggressively,” said Brian Rose at UBS Global Wealth Management. “The decision whether to cut by 50 basis points instead of the usual 25 basis points may come down to the August labor report.”
Rose also notes that Thursday’s retail sales data is another critical release as the main downside risk to his base-case scenario of a soft landing is a pullback in consumer spending.
“The U.S. economy is sustainably cooling, and the labor market is exhibiting a bit of slowing,” said Neil Sun, a BlueBay portfolio manager at RBC Global Asset Management. “However, we are not overly concerned over U.S. recession risks in the short-term. We stand ready to thoughtfully capitalize on any pockets of volatility should underlying trends of cooling inflation and sustainably slowing U.S. economy continue.”
Corporate Highlights:
· UBS Group AGposted 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.
· Apple Inc., seeking new sources of revenue, is moving forward with development of a pricey tabletop home device that combines an iPad-like display with a robotic limb.
· 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 US$1.9 billion deal to give U.S. antitrust enforcers more time to discuss a potential settlement.
· Mars Inc. has secured the biggest blue-chip debt financing for a merger and acquisition in nearly a year to help finance its $36 billion purchase of Kellanova.
Key events this week:
· China home prices, retail sales, industrial production, Thursday
· U.S. initial jobless claims, retail sales, industrial production, Thursday
· Fed’s Alberto Musalem and Patrick Harker speak, Thursday
· U.S. housing starts, University of Michigan consumer sentiment, Friday
· Fed’s Austan Goolsbee speaks, Friday
Some of the main moves in markets:
Stocks
· The S&P 500 rose 0.4% as of 4 p.m. New York time
· The Nasdaq 100 was little changed
· The Dow Jones Industrial Average rose 0.6%
· The MSCI World Index rose 0.5%
Currencies
· The Bloomberg Dollar Spot Index was little changed
· The euro rose 0.2% to $1.1013
· The British pound fell 0.3% to $1.2829
· The Japanese yen fell 0.4% to 147.36 per dollar
Cryptocurrencies
· Bitcoin fell 2.6% to $59,026.84
· Ether fell 0.9% to $2,674
Bonds
· The yield on 10-year Treasuries declined one basis point to 3.83%
· Germany’s 10-year yield was little changed at 2.18%
· Britain’s 10-year yield declined six basis points to 3.82%
Commodities
· West Texas Intermediate crude fell 1.5% to $77.18 a barrel
· Spot gold fell 0.7% to $2,447.18 an ounce
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