US Stocks Rally as Softer CPI Data Tempers Rate-Hike Fears

The S&P 500 and Nasdaq advanced Tuesday as a cooler-than-expected June inflation report and solid big bank earnings boosted risk appetite, while Federal Reserve officials welcomed the data but cautioned they need more evidence before declaring victory over price pressures.

The S&P 500 gained 28.55 points, or 0.38%, to 7,543.89, and the Nasdaq Composite rose 233.83 points, or 0.90%, to 26,107.01. The Dow Jones Industrial Average was nearly flat, up 10.02 points, or 0.02%, to 52,508.66. Technology shares led gains among S&P 500 sectors, while healthcare lagged.

European shares also rose, with the pan-European Stoxx 600 index closing 0.2% higher at 642.1 points, recouping earlier losses. Crypto markets rallied as well: Bitcoin rose 3.8% to $64,434.55, Ethereum gained 6.1% to $1,874.98, and Solana added 2.8% to $76.97.

Inflation Cools More Than Expected

The Labor Department’s Consumer Price Index showed inflation slowed more than analysts expected in June. The CPI fell 0.4% month-over-month, the first monthly decline since April 2020, after advancing 0.5% in May. On a year-over-year basis, the CPI rose 3.5%, down from 4.2% in May. Economists polled by Reuters had forecast a 3.8% annual rise.

The pullback was largely driven by energy prices, which dropped 5.7% month-over-month — the largest decline since April 2020 — after rising 3.9% in May. Gasoline prices tumbled 9.7%, according to the Labor Department data.

Excluding volatile food and energy components, the so-called core CPI increased 2.6% year-over-year after rising 2.9% in May. Core CPI was unchanged over the month after gaining 0.2% in May.

The cost of shelter rose just 0.1% month-over-month, the smallest gain since January 2021, according to the report. Owner’s equivalent rent increased 0.2%. Motor vehicle insurance dropped 2.0%, and communication prices fell 1.5%.

Fed Officials Cautious on One Report

Federal Reserve Chair Kevin Warsh, in his first congressional testimony since confirmation, acknowledged the data but stopped short of declaring progress sustainable.

“While I reviewed the data that came out this morning on CPI, and it was positive relative to expectations, I’m not for cherry-picking; I’m not going to show up here and say ‘mission accomplished,’” Warsh told the House Financial Services Committee. “What I’d say is there’s plenty of work to do, and I would feel more confident if we had better data to inform our decision-making.”

Warsh did not say whether the “work to do” included raising the Fed’s policy rate, currently in the 3.50%-3.75% range, or merely holding it steady. He said he would “ask our colleagues and have a good family fight about the extent and timing in which we would need to deploy” monetary policy tools.

Chicago Fed President Austan Goolsbee called the report “surprisingly benign” and “encouraging,” but told the Kenosha Area Business Alliance: “I would be feeling a lot better if there were several months more of such reports.” He added, “I’m heartened by this CPI data today, but we need a lot more than one month to think that it is going well.”

On Monday, before the CPI release, Fed Governor Christopher Waller said he would take little signal from a single cooler reading and noted he would need to see several months of easing. Waller was explicit that another hot reading would require a “near-term” response.

Rate-Hike Bets Slashed

Financial markets sharply reduced expectations for a rate increase at the Fed’s July 28-29 meeting. Following the CPI report, CME’s FedWatch tool showed an 83.4% probability that the Fed will hold rates steady in July, up from 58.3% on Monday.

Traders now see only about a 10% to 15% chance of a quarter-point rate hike at the July meeting, according to multiple sources. The probability of a hike in September stood at roughly 60% to 65%. Markets still expect at least one 25-basis-point rate increase before year-end.

“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.”

Bank Earnings Solid, IBM Plunges

Second-quarter earnings season kicked off with five big US banks reporting results. Goldman Sachs surged 9% after surpassing profit expectations, driven by dealmaking and trading strength. JPMorgan Chase rose 2.5% and Bank of America gained 1.9%, both delivering consensus-beating profits. Citigroup slid 5.3% on expense concerns, and Wells Fargo dropped 2.7%.

IBM shares tumbled 25.2% after the company warned second-quarter revenue would fall below estimates, a move that also weighed on European software stocks.

“It’s a big earnings week, so we finally get to hear from corporate America,” said Tom Hainlin, national investment strategist at US 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.”

Middle East Conflict Clouds Outlook

The cooler June inflation reading was partly attributed to abating energy price pressures amid signs of progress in US-Iran peace negotiations last month. However, that ceasefire collapsed last week after commercial tankers came under fire in the Strait of Hormuz, triggering renewed airstrikes between the United States and Iran.

The US has reimposed a naval blockade on Iran, and oil prices have risen to four-week highs. Gasoline prices are climbing again, with the national average rising to $3.86 a gallon from $3.79 a week ago, according to AAA data cited by one report.

Economists warned that the inflation relief may be temporary. “Energy prices plunged on the Iran cease-fire and memorandum of understanding,” said Scott Anderson, chief economist at BMO Capital Markets, as reported by the Star-Advertiser. “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.”

The Producer Price Index, a gauge of wholesale inflation, is due Wednesday, which will provide a fuller picture of June price pressures. The Fed’s next policy meeting is July 28-29.