Lower Inflation Could Shut Down Fed Rate Hikes

Stocks gapped up at the open after a better than expected inflation report (see below). At the moment, the Dow is up 160 points and the S&P 500 is up .7%. The dollar fell relative to foreign currencies and commodities traded higher. WTI crude oil rose to $75.60/barrel. The bond market caught a bid as well. Long-term Treasures and intermediate corporates are up nearly 1% in early trading.

The Consumer Price Index (CPI), a closely followed gauge of retail price inflation in the US, slowed to a 3% annual rate in June. That’s the lowest level since March 2021. Gasoline prices fell for the fourth consecutive month, and food inflation continued to decelerate. But even excluding these more volatile categories, Core CPI slowed to a 4.8% annual rate, the slowest since October 2021. Both CPI and Core CPI came in a bit lower than economists were expecting.

This report proves that the Federal Reserve’s efforts are paying off and suggests the economy is on a path back to the Fed’s 2% target. Investors hope the data will convince Fed officials to stop hiking interest rates. Certainly that bet looks a little more likely, and that’s why we’re seeing Treasury bond yields fall this morning. The 2-year Treasury yield eased back to 4.73% from 4.89%. Lower interest rate expectations are the major theme in today’s trading session.