Wall Street Rallies as Cooler CPI Eases Rate-Hike Fears; Warsh Strikes Hawkish Tone

U.S. equities pushed higher Tuesday, led by the Nasdaq, as a cooler-than-expected June inflation report all but erased the chance of a Federal Reserve rate hike at this month’s policy meeting. The rally extended to European markets and cryptocurrencies, though gains were tempered by renewed Middle East hostilities and a hawkish tone from Fed Chair Kevin Warsh during his first congressional testimony since confirmation.

The S&P 500 rose 28.55 points, or 0.38%, to 7,543.89, and the Nasdaq Composite gained 233.83 points, or 0.90%, to 26,107.01. The Dow Jones Industrial Average eked out a 10.02-point gain, or 0.02%, to 52,508.66. Volume on U.S. exchanges was 16.38 billion shares, well below the 21.66 billion average over the past 20 sessions.

**Inflation Data Shifts Rate Expectations**

The Labor Department’s Consumer Price Index fell 0.4% in June, the first monthly decline since April 2020, after a 0.5% gain in May. On a 12-month basis, the CPI increased 3.5%, down from 4.2% in May and below the 3.8% consensus forecast. Core CPI, excluding volatile food and energy, was unchanged month-over-month and rose 2.6% year-on-year, versus 2.9% in May.

Energy prices drove the pullback, dropping 5.7% as gasoline tumbled 9.7%. The decline reflected a temporary ceasefire between the U.S. and Iran that collapsed last week after commercial tankers came under fire in the Strait of Hormuz. Since then, oil prices have resumed climbing, with the national average gasoline price rising to $3.86 per gallon from $3.79 a week ago, according to data from motorist advocacy group AAA.

Following the CPI release, financial markets priced in an 83.4% likelihood that the Fed will hold its key rate steady at the July 28-29 meeting, up from 58.3% on Monday. Traders now see about a 10% chance of a quarter-point hike this month, down from 35% before the report. Still, at least one 25-basis-point increase by year-end remains on the table, according to CME’s FedWatch tool.

**Warsh Testifies on Capitol Hill**

Fed Chair Kevin Warsh sat for his first congressional testimony since his confirmation, outlining the central bank’s plan to contain upward price pressures. Warsh acknowledged the cooling inflation but downplayed the significance of the June figures, saying they did not indicate that “everything is well.” He told lawmakers the Fed has “no tolerance for persistently elevated inflation.”

“The inflation report seems to have weakened the argument that the Fed is going to raise rates,” said Chuck Carlson, chief executive at Horizon Investment Services. “It gives the Fed cover, for now.” Carlson added: “(Warsh) is saying we can bring down inflation, and that’s what the people he was speaking to want to hear. And maybe inflation is going to come down without having to raise rates.”

Despite the softer CPI, economists cautioned that the data had been overtaken by the renewed conflict. “Energy prices plunged on the Iran cease-fire and memorandum of understanding,” said Scott Anderson, chief economist at BMO Capital Markets. “But with fighting back on in the Gulf, the MOU in tatters and energy prices heading higher again in July, the balance of risks remains more heavily weighted toward a rate hike at some point this year.”

**Bank Earnings Kick Off Second Quarter**

Second-quarter earnings season began with five big U.S. banks reporting solid results, buoyed by trading strength and dealmaking. Goldman Sachs surged 9% after surpassing profit expectations as geopolitical uncertainties boosted its trading business. JPMorgan Chase rose 2.5% and Bank of America added 1.9%, both delivering consensus-beating profits. Citigroup slid 5.3% as worries over expenses overshadowed its profit beat, and Wells Fargo dropped 2.7%.

“It’s a big earnings week, so we finally get to hear from corporate America,” said Tom Hainlin, national investment strategist at U.S. Bank Asset Management. “What we continue to look for from the banks is what are they seeing in terms of consumer health? So far, good news on that front.”

IBM shares tumbled 25.2% after the company warned second-quarter revenue would fall below estimates, citing the AI boom squeezing software budgets.

**Bond Market Rally, Dollar Weakens**

The inflation surprise unleashed a sharp rally in U.S. government bonds. Two-year Treasury yields, which closely track monetary policy changes, tumbled as much as 14 basis points to 4.14%, the biggest daily drop since August, before paring the decline. The dollar weakened against every major currency. The rally faded somewhat after Warsh’s testimony, with two-year yields down about 10 basis points by late afternoon.

“Today’s print takes a July hike off the table,” said Zach Griffiths, head of investment grade and macro strategy at CreditSights. “While inflation is still too high and the situation in the Middle East is deteriorating, today’s data should give them enough cover to stay in wait-and-see mode.”

**Crypto Markets Rally**

Cryptocurrencies advanced alongside equities. Bitcoin rose 3.8% to $64,434.55, Ethereum gained 6.1% to $1,874.98, and Solana added 2.8% to $76.97. The improved sentiment followed the CPI data, which reduced the likelihood of a rate hike that would pressure crypto prices. Separately, a U.S. government transfer of $288 million in seized Bitcoin and Ether to Coinbase Prime kept policy attention on the sector.

**European Shares Edge Higher**

European stocks ended higher, with the pan-European Stoxx 600 index closing 0.2% higher at 642.1 points after falling as much as 0.9% earlier. Basic materials jumped 2.4% as metal prices rallied against a weaker dollar. European oil and gas stocks climbed 1.3%, tracking higher crude oil prices after the U.S. reimposed a naval blockade on Iran. Brent crude rose above $85 per barrel.

Energy giant BP said it expects stronger oil and gas prices to lift second-quarter earnings; its shares gained 2.3%. Ericsson dropped 12.6% after quarterly sales slightly missed estimates and it warned of rising component costs. Software-related companies SAP and Capgemini fell 2.8% and 1.6% respectively amid global weakness after IBM’s warning.

**Outlook**

The combination of cooling inflation and solid bank earnings provided a short-term boost, but the deteriorating situation in the Middle East and rising oil prices cloud the outlook. “The outlook for inflation in July is less promising,” said Bill Adams, chief economist at Fifth Third Commercial Bank. Minutes of the Fed’s June 16-17 meeting, published last week, showed policymakers’ concerns about inflation mounted even before the renewed hostilities.