Market Snapshot: Dow rises almost 300 points after CPI data shows inflation at lowest in more than two years

What’s driving markets

Stocks rose while Treasury yields
TMUBMUSD02Y,
4.737%

TMUBMUSD10Y,
3.868%
and the dollar
DXY,
-1.03%
were lower after data on Wednesday showed U.S. inflation at its slowest pace in more than two years.

U.S. consumer prices rose a modest 0.2% in June. Economists polled by the Wall Street Journal forecasted an increased of 0.3%. The yearly rate of inflation decelerated to 3% from 4% in the prior month, marking the lowest level since March 2021.

The so-called core rate of inflation that omits food and energy rose a mild 0.2% last month. That’s the smallest increase in almost two years. Wall Street had forecast a 0.3% gain. The annual rate of core inflation decreased to 5% from 5.3% in the prior month.

See: U.S. inflation slows again, CPI shows, as Fed weighs another rate hike

The markets have been receiving the CPI print “pretty well,” said Brian Katz, chief investment officer at the Colony Group.

The lower-than-expected CPI data is likely to “prolong the uptrend [in stocks] that we’ve been experiencing this year,” Katz in a call. “As long as we are in this environment where disinflation continues and we have reasonable growth, it is a good environment for risk assets,” Katz said.

Inflation in June fell in a majority of the important categories, most notably housing prices, which had been elevated, according to George Mateyo, chief investment officer at Key Private Bank. 

“The Fed will embrace this report as validation that their policies are having the desired effect – inflation has fallen while growth has not yet stalled. But it most likely won’t change their mind to raise interest rates later this month,” Mateyo wrote in emailed comment Wednesday. 

Fed fund futures traders are still pricing in an over 90% chance that the Fed will raise its benchmark interest rate by 25 basis points in its meeting later this month, according to CME Fed Watch. They are pricing in a 12.9% likelihood that the U.S. central bank will raise interest rate again in September. That is down from 22.3% a day ago.

Still, some analysts are optimistic that the Fed may cease its interest rate hikes.

The inflation print in June “is enough on a standalone basis for the market to put in question the Fed’s dot projections of two additional hikes left this year and consequently pull interest rate volatility down,” according to Alexandra Wilson-Elizondo, deputy chief investment officer of multi asset solutions at Goldman Sachs Asset Management.

“Yet despite the disinflationary trends, the level of Fed funds rate has only risen to levels comparable to inflation. This contrasts with previous hiking cycles when the Fed hiked rates well above inflation. Therefore, we continue to expect that US monetary policy will stay restrictive for longer, but after this print the Fed very well may be done,” Wilson-Elizondo wrote in emailed comment.

There will also be a batch of commentary from Fed officials for the market to contend with on Wednesday. 

U.S. government bank regulators should run a new “high-inflation” stress test to identify at-risk banks and be able to better gauge their capital shortfalls, said Minneapolis Federal Reserve President Neel Kashkari on Wednesday.

“The potential losses banks face today from interest rate risk appear to be more idiosyncratic than systemwide, and this high-inflation stress test would help banks prepare for a worse-than-expected scenario,” Kashkari said, in a blog post and a subsequent panel discussion on bank stability hosted by his regional Fed bank.

Atlanta Fed President Bostic will make comments at 1 p.m. and the Fed Beige Book will be released at 2 p.m.. All times Eastern.

Companies in focus

• Shares of ShiftPixy Inc.
  PIXY,
  -18.70%
  plunged 15% Wednesday, after the workforce management software company’s public equity offering valued the stock at a deep discount.

• Lucid Group Inc.
  LCID,
  -9.90%
  shares dropped 9.6% after the company said Wednesday that it delivered 1,404 vehicles during the second quarter, while producing 2,173 vehicles at its Arizona facility. 

• SunPower Corp.
  SPWR,
  +9.35%
  shares jumped 7.6% Wednesday after Raymond James analyst Pavel Molchanov upgraded the stock to strong buy from outperform.