- Stocks rose and the dollar fell as softer-than-expected inflation data fueled speculation that the Federal Reserve might shift to a slower pace of hikes – a view taken with a grain of salt by market observers who believe officials are still a long way from achieving their goal.
- The S&P 500 reached a three-month high on Wednesday as traders went risk-on. A rally in technology stocks lifted both Nasdaq indexes more than 20% above their June lows, putting them in a bull market by one definition. The CBOE volatility index fell below 20, a level not seen since April. The dollar has dropped the most since the pandemic began. Treasury two-year yields have recovered from a 20 basis point drop.
- The July consumer price index brought a sigh of relief to a market plagued by fears about the Fed's struggles to tame the inflation beast, with both core and overall measures coming in below forecasts. Swaps now suggest that a 50-basis-point move in September is more likely than a repeat of the 75-basis-point increases that officials chose to implement at their previous two meetings.
- One risk of current stock-market bullishness is that it may lead to a loosening of financial conditions, which would contradict the Fed's goals. It's also worth remembering the early 1980s, when then-Fed Chair Paul Volcker eased policy as inflation reached a peak and the economy entered a slump. However, the easing of price pressures proved to be much slower than officials had hoped, and they were forced to tighten again months later.
- In fact, the CPI surprise is just one piece of the complex puzzle officials are working on right now – and possibly for the next few months – with the central bank still a long way from meeting its inflation target. Food prices in the United States rose the most since 1979 in July, keeping the cost of living excruciatingly high even as lower gasoline prices provided some relief to consumers.
