Wall Street Rallies as Cooler Inflation Data, Warsh Remarks Dim Rate-Hike Expectations

U.S. stocks rallied Tuesday, with the S&P 500 and Nasdaq posting solid gains, after a softer-than-expected June consumer price index report sharply reduced market expectations for a Federal Reserve interest rate hike later this month.

The S&P 500 gained 0.38% to end at 7,544.03, while the Nasdaq Composite rose 0.91% to 26,109.65, according to preliminary data from the Economic Times. The Dow Jones Industrial Average edged up 0.05% to 52,527.56. The rally extended beyond equities: European shares closed higher, with the pan-European Stoxx 600 index rising 0.2%, and major cryptocurrencies also jumped, with Bitcoin up 3.8% and Ethereum up 6.1%, according to Nasdaq.

The catalyst was the Labor Department’s June CPI report, which showed consumer prices fell 0.4% month-over-month, the first monthly decline since April 2020, and rose 3.5% year-over-year, down from 4.2% in May, as reported by the Star-Advertiser. Economists polled by Reuters had forecast a 3.8% annual gain and a 0.1% monthly dip. The pullback was largely driven by a 5.7% drop in energy prices, with gasoline tumbling 9.7%, amid signs of progress in U.S.-Iran peace negotiations last month.

The benign inflation data sent bond yields tumbling. Two-year Treasury yields, which closely track monetary policy expectations, fell as much as 14 basis points to 4.14%, the biggest one-day drop since August, before paring some losses, according to Bloomberg reporting in the Financial Post. The dollar weakened against every major currency.

**Fed Officials Welcome Data, but Remain Cautious**

Federal Reserve Chairman Kevin Warsh, in his first congressional testimony since taking office, told the House Financial Services Committee that the CPI report was “positive relative to expectations,” but he cautioned against declaring victory. “I’m not for cherry-picking; I’m not going to show up here and say ‘mission accomplished,’” Warsh said, as reported by Reuters in separate accounts from Businesstimes and wkzo.com. “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 specify whether the “work to do” included a rate hike or merely a prolonged hold at the current 3.50%–3.75% range. He said he would “ask our colleagues and have a good family fight about the extent and timing” of deploying the Fed’s monetary policy tools, reiterating the central bank’s commitment to price stability.

Chicago Fed President Austan Goolsbee echoed the cautious tone, calling the report “surprisingly benign” and “encouraging” but adding, “I would be feeling a lot better” with several months of similar data, according to the same Reuters report. “I’m heartened by this CPI data today, but we need a lot more than one month to think that it is going well,” he told the Kenosha Area Business Alliance.

Despite the cautious rhetoric, financial markets seized on the data to unwind rate-hike bets. Traders now see only about a 15% chance of a quarter-point rate increase at the Fed’s July 28–29 meeting, down from 35% before the report, Reuters reported. The Economic Times cited CME’s FedWatch tool showing an 83.4% likelihood the Fed will hold rates steady this month. However, odds of at least one 25-basis-point hike by year-end remain, with a roughly 60%–65% probability of a move in September, according to multiple sources.

**Earnings Season Kicks Off Amid Middle East Risks**

The rally was also supported by the start of second-quarter earnings season, with big U.S. banks reporting solid results. Goldman Sachs surged after surpassing profit expectations, while JPMorgan Chase and Bank of America advanced on consensus-beating earnings, the Economic Times reported. Citigroup slid on expense concerns, and Wells Fargo also declined. IBM shares tumbled after warning that second-quarter revenue would fall below estimates.

The positive inflation reading provided a counterweight to mounting geopolitical risks. The U.S. re-imposed a naval blockade on Iran this week, and renewed hostilities pushed oil prices to a four-week high, as reported by Businesstimes and the Star-Advertiser. The consumer price report reflected the brief lull in tensions last month, but analysts warned that July inflation could reaccelerate.

“Energy prices plunged on the Iran cease-fire and memorandum of understanding,” Scott Anderson, chief economist at BMO Capital Markets, told 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 Star-Advertiser also quoted Bill Adams of Fifth Third Commercial Bank saying, “The outlook for inflation in July is less promising.” The national average gasoline price has already risen to $3.86 a gallon from $3.79 a week ago, according to AAA data cited in the same report.

**More Data Ahead**

A fuller picture of June inflation will emerge Wednesday when the government releases the Producer Price Index. The Fed’s preferred inflation gauge, the Personal Consumption Expenditures Price Index, will not be officially released until after the July policy meeting. Fed Governor Christopher Waller said Monday he would take little signal from a single cooler reading, echoing the need for several months of easing inflation, as reported by Reuters.

For now, the combination of a surprising inflation dip and cautious-but-not-hawkish Fed commentary has given markets a reprieve. As Chuck Carlson, chief executive at Horizon Investment Services, told the Economic Times: “The inflation report seems to have weakened the argument that the Fed is going to raise rates.