*The dollar sank the most since the onset of the pandemic. Treasury two-year yields were lower by about five basis points in late trading after plummeting nearly 20 basis points immediately after the data. West Texas Intermediate crude topped $91 a barrel.*
*For the market, it's sort of a Goldilocks scenario right now because you have the labor market holding up and inflation potentially starting to come down. That is what a soft landing would look like. But one month of slowing inflation is not enough for the Fed to send an all-clear signal*
*(Inflation at) 8.5% is still very high, but there is optimism that perhaps June was the peak. Producer prices data for July on Thursday along with August inflation and employment data for release next month could alter the course of the Fed again.*
*The Fed has hiked its policy rate by 225 basis points since March despite fears the sharp rise in borrowing costs could tip the U.S. economy into a recession.*
*The slowing of inflation was the first "positive" reading on price pressures since the Fed began tightening policy, Chicago Fed President Charles Evans said, even as he signaled he believes the Fed has plenty more work to do.*
On Tuesday, the Dow Jones Industrial Average fell 0.2% to 32774, the S&P 500 declined 0.4% to 4122 — its fourth-straight losing session — and the Nasdaq Composite dropped 1.2%, to 12493, its third consecutive drop.
*Volume on U.S. exchanges was 11.33 billion shares, compared with the 10.98 billion average for the full session over the past 20 trading days.*
*What’s driving markets*
*The consumer price index was unchanged in July, compared with the 1.3% gain in the prior month, according to the Labor Department. The rate of inflation in the 12 months ended in July slowed to 8.5% from a 41-year high of 9.1% in June.*
*The closely-watched core measure of inflation that omits volatile food and energy prices rose 0.3% in July, a slower pace than a 0.7% gain in the prior month. The 12-month rate remained steady at 5.9%.*
*While much will be made of the indication that headline inflation may be peaking, core inflation remained significantly above target, meaning it is far too early for the Fed to “declare victory” and cease raising interest rates. With the Atlanta Fed’s measure of wage growth now at 6.7%, core inflation is unlikely to return to anywhere near target until wage pressures moderate significantly. With unemployment at the lowest level in over 50 years and workers demanding pay rises to try to keep up with inflation, wage growth is unlikely to moderate sufficiently to return inflation to the Fed’s target, without first seeing a rise in unemployment. So while a peak in inflation is welcome news, it’s probably not enough to allow the Fed to ease off its tightening or to put recession fears to bed.*
*For a market plagued by fears about the Fed’s struggles to tame the inflation beast, the July consumer price index brought a sigh of relief -- with both core and overall measures coming in below forecasts. Swaps are now suggesting a move of 50 basis points as more likely in September than a repeat of the 75-basis-point increases that officials have opted to implement at their past two meetings.*
“This is overall good news for risky assets,” wrote Florian Ielpo, head of macro at Lombard Odier Asset Management, adding that “a lower growth rate of prices does not mean the end of inflation, and naturally the end of hawkish central banking. Inflation remains a situation that requires the Fed’s attention and more importantly the Fed’s measures.”
One danger of the stock-market bullishness right now is it could cause a relaxation of financial conditions that would go against the Fed’s goals. It’s also worth looking back to the early 1980s, when then Fed Chair Paul Volcker eased policy as inflation peaked and the economy tipped into a recession. But the moderation of price pressures proved to be much slower than officials wanted -- and they had to tighten again months later.
By: via @AlliesFin Serve Stock Market
