Cool June CPI Print Powers Daily Rally

Stocks surged Wednesday, buoyed by market optimism following the release of inflation data that showed a cooler-than-anticipated rise for June.

The Dow Jones Industrial Average gained by 140 points, or 0.4%, while the S&P 500 advanced 0.6%, reaching a fresh 2023 peak and the highest level since April of the previous year. The tech-heavy Nasdaq Composite climbed 0.7%.

Banks took center stage, riding the wave of positive market sentiment. Shares of Citigroup and Goldman Sachs surged 2.9% and 2.5% respectively, while regional banks like Comerica and Zions Bancorporation leaped 5.1% and 4.9%.

According to the latest report, the Consumer Price Index (CPI) registered a year-over-year increase of 3% in June, a notch below the 3.1% increase economists polled by Dow Jones had expected. On a month-over-month basis, the index climbed a modest 0.2% in June, also falling short of projections. Moreover, core CPI, which excludes volatile components like food and energy prices, also printed cooler than anticipated, climbing 4.8% annually vs. 4.9% expected.

But housing costs, particularly rent, remain in a very inflationary trend. The shelter index accounted for over 70% of the core inflation increase, rising 7.8% over the year and 0.4% from May to June on a seasonally adjusted basis. On the other hand, prices for airline fares and used cars softened, falling 8.1% and 5.2% year-over-year respectively.

The Fed, which is still shooting for a 2% inflation rate, is widely expected to continue hiking interest rates this year in response to the higher-than-target inflation and strong jobs data. “Rapid disinflation in June illustrates the difficult position the Fed finds itself in,” commented EY economist Greg Daco. He added that while inflation dynamics would suggest a rate hike in June would have been more sensible, Fed Chair Powell and most policymakers seem intent on raising the federal funds rate at the upcoming July FOMC meeting.

As Wall Street prepares for the release of more Fed officials’ comments on U.S. economic policy today, investors seem to be largely banking on another 0.25% rate hike at the July 26 policy meeting, with market pricing currently reflecting a roughly 90% chance of this happening, according to the CME Group’s FedWatch Tool.

“Inflation is going the way that the Federal Reserve wants it to go,” observed Megan Horneman, Chief Investment Officer at Verdence Capital Advisors. “But I don’t think we’re ready to say that they’re going to be able to cut rates.”

Horneman highlighted three key areas of concern for the Fed, “service inflation, wage inflation, and housing inflation. All three of those things, while they are moderating, are still uncomfortably high.”

Investors and economists alike are now turning their attention to the forthcoming release of the Producer Price Index (PPI) data for June, scheduled for Thursday before the opening bell. Both the CPI and PPI are key indicators closely monitored by market players for any hint of future inflation trends, which could signal the Federal Reserve’s strategy on interest rates.

Fed officials are expected to comment on today’s CPI release. If they lean dovish in the slightest, their remarks would likely fuel a major short-term rally heading into the July FOMC, which wraps up on the 26th. The market assumes that another hike is coming this month. If that expectation starts leaning toward “skip,” bulls would have the green light to really start buying with both hands, even near the S&P’s yearly high.


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