Cooling Inflation Sends Stocks Soaring

• US stocks rallied Wednesday after data showed headline US inflation cooled in July. 
• The headline reading of 8.5% was below expectations of 8.7% and cooled from June’s 9.1% rate. 
• Core inflation was steady at 5.9% as falling gas prices were offset by increased food and shelter costs. 

US stocks soared Wednesday after US government data showed a deceleration in inflation in July, bolstering the view that the Federal Reserve may be edging closer to the end of its aggressive rate-hike campaign. 

The S&P 500 rallied after posting its fourth straight loss in the previous session and the Nasdaq Composite looked to break a string of three consecutive declines. Equities popped up after the Bureau of Labor Statistics said headline inflation rose to 8.5% in the year through July. That was slower than June’s 9.1% rate and below the Bloomberg consensus estimate of 8.7%. 

Core CPI, which excludes more volatile food and energy prices, was unchanged at 5.9% as a drop in gas prices offset increases in the food and shelter indexes. Shelter costs make up roughly 40% of the core reading. July’s month-over-month increase of 0.3% was smaller than June’s 0.7% monthly rate. 

“The deceleration in the Consumer Price Index for July is likely a big relief for the Federal Reserve, especially since the Fed insisted that inflation was transitory, which was incorrect,” Nancy Davis, founder of Quadratic Capital Management, said in a note.

Here’s where US indexes stood at the 9:30 a.m. opening bell on Wednesday: 

“If we continue to see declining inflation prints, the Federal Reserve may start to slow the pace of monetary tightening,” Davis said. “While the Fed has hiked interest rates by 225 basis points already this year, the market is pricing in an additional 117 basis points of hikes still to come in 2022.”

Falling gas prices are a “harbinger of improving personal finances and lower inflation,” John Leer, chief economist at Morning Consult, wrote in a note. “Having said that, growing consumer optimism doesn’t change the fact that inflation remains well above the Fed’s 2% target.” 

The Federal Reserve Open Market Committee’s next monetary policy meeting is scheduled for September 20-21.

Around the markets, US gas prices have dropped below $4 a gallon for the first time since March, according to GasBuddy. Goldman Sachs expects prices to rise again. 

Elon Musk has sold $7 billion worth of Tesla shares to raise cash in case he’s forced to buy Twitter. According to Wedbush’s Dan Ives, the move by Musk is writing on the wall that his Twitter takeover deal is likely to go through. 

Oil prices were mixed. West Texas Intermediate crude shed 0.2% to $90.60 per barrel. Brent crude, the international benchmark, picked up 0.1% to $96.41. 

Gold slipped 40 cents to $1,811.90 per ounce. The 10-year Treasury yield fell 6 basis points to 2.72%. 

Bitcoin gained 3.3% to $23,904.04.