A cooler-than-estimated inflation reading spurred gains in both stocks and bonds, easing concern about the potential for imminent Federal Reserve rate hikes amid a resurgence in oil prices.
The S&P 500 was set to extend its July advance, with a rally in chipmakers also helping sentiment and overshadowing a slide in software shares after International Business Machines Corp.’s sales miss. Big banks kicked off the earnings season with solid results. Treasury 10-year yields fell six basis points to 4.57 per cent. Money markets trimmed bets on a July Fed hike to 20 per cent.
U.S. consumer prices declined in June for the first time in six years and a key gauge of underlying inflation was little changed. Fed officials will likely welcome the data ahead of the central bank’s upcoming meeting, though a new upturn in oil prices amid renewed hostilities between the United States and Iran risks prolonging the inflationary fallout from the conflict.
“The Fed was losing patience with high inflation readings, and today’s cooler-than-expected report gives them room to breathe,” said Ellen Zentner at Morgan Stanley Wealth Management. “By surprising on the downside, it relieves immediate pressure for action.”
Fed Chairman Kevin Warsh said policymakers at the central bank have no tolerance for high inflation, reiterating a vow to tame price growth that has been elevated for five years.
“The members of our committee have no tolerance for persistently elevated inflation,” Warsh said Tuesday in testimony he’s scheduled to deliver before lawmakers at 10 a.m. “And we share a resolute commitment to restoring price stability.”
“The weaker inflation data likely keeps the Fed on hold for now and reduces any rate hike odds, but we remind investors that almost every communication that has emanated from Chair Warsh during his short tenure so far has been hawkish,” said Skyler Weinand at Regan Capital.
The well-behaved CPI print likely lowers pressure on the Fed to hike soon, but the re-ignition of hostilities in Iran means the prospect of hikes is far from over, according to Kay Haigh at Goldman Sachs Asset Management.
“Although a path remains for rates to stay unchanged this year, the re-escalation of the conflict has narrowed it,” he said.
The interim peace between the U.S. and Iran effectively collapsed after American forces reimposed a naval blockade and launched another wave of airstrikes, while Tehran attacked more oil tankers sailing through the Strait of Hormuz. Traffic through the all-important waterway has dwindled and oil has surged 20 per cent since attacks restarted.