Instant View: US CPI unchanged in July, raises hopes of Fed slowing

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A person shops for meat in a supermarket in Manhattan, New York City

NEW YORK (Reuters) – U.S. consumer prices decelerated in July as gasoline prices dropped sharply, raising hopes the U.S. Federal Reserve may dial back its aggressive path of interest rate hikes.

The consumer price index was unchanged last month after advancing 1.3% in June, the Labor Department said on Wednesday. In the 12 months through June, the CPI climbed 8.5%, below expectations of an 8.7% rise and after a 9.1% rise in June.

MARKET REACTION:

STOCKS: S&P 500 futures turned sharply higher, and were up 1.7%

BONDS: The yield on 10-year Treasury notes was down 5.6 basis points to 2.741%; The two-year U.S. Treasury yield, was down 16.3 basis points at 3.123%.

FOREX: The dollar index fell 1.11%

COMMENTS:

IAN LYNGEN, HEAD OF US RATES STRATEGY, BMO CAPITAL MARKETS, NEW YORK

“Overall, incremental confirmation that the Fed’s efforts to combat consumer price increases have been successful. The combination of NFP and CPI for July leave the 75 bp vs. 50 bp Sept hike debate alive and well. Moreover, this means volatility around incoming data will remain elevated.

“Treasuries were under pressure in the run-up to this morning’s inflation print with the curve skewed modestly steeper. Since the release the market has rallied sharply and extended the steepening — we like the -40 bp level in 2s/10s as a re-entry point to add to a core flattener and expect that the incoming Fed-speak will emphasize the idea that the Fed will need to see more than one month of data for confirmation inflation has, in fact, peaked.”

GENNADIY GOLDBERG, INTEREST RATE STRATEGIST, TD SECURITIES, NEW YORK

“I think (the market reaction) just shows you the whipsaw on market price action every time you get a piece of data that can move the expectations for Fed rate hikes. The downside miss is certainly not something the markets were positioned for, I think the market was really one way positioned for a higher inflation print and higher Fed pricing.

“There’s still quite a bit of data between now and September… we’ve only gotten one out of two CPI prints before then and we’ve got another payroll print as well and a full set of data effectively for August, so I think the jury’s still very much out on September.”

TIM GHRISKEY, SENIOR INVESTMENT STRATEGIST, INGALLS & SNYDER, NEW YORK

“It’s quite a surprise and that’s why the market is reacting so positively. Is this a solid indication inflation is waning? It’s too early to make that statement. On the other hand assuming this data doesn’t get revised it’s certainly good news for the economy.

“It seems like an extreme reaction to one data point. We’ve PPI tomorrow and that could show a different story. These measures don’t march together. The Fed’s preferred measure of inflation is PCE. It’s more stable than CPI and PPI.

“Certainly it will add to the inflation data the Fed looks at but it’s not going to rely on this one number. The fed is determined to drive inflation lower and one month is not going to change their resolve. It could be an aberration and we could see a revision.

“I’m cautiously optimistic about this data but I’m not ready to declare that the Fed is victorious.”

THOMAS HAYES, CHAIRMAN AND MANAGING MEMBER, GREAT HILL CAPITAL, NEW YORK

“As expected, we finally saw a reprieve.  This now brings the idea of a Fed ‘pivot’ or slowdown (in hikes) back on the table after Friday’s strong jobs report took it off.”

QUINCY KROSBY, CHIEF GLOBAL STRATEGIST, LPL FINANCIAL, FORT MILL, SOUTH CAROLINA

    “We are seeing the futures market enjoying the positive surprise, the lower-than-consensus estimate. Still, inflation remains intact, but it is moving in the right direction. The question is for the Fed does it have to continue its aggressively hawkish rhetoric? The question is does inflation to continue to ease?

    “What you are seeing is the  market enjoying the possibility of the Fed moving toward a less hawkish, not dovish, but slightly less hawkish stance.

It’s obviously showing up in the fed funds futures market.”

BRIAN JACOBSEN, SENIOR INVESTMENT STRATEGIST, ALLSPRING GLOBAL INVESTMENTS, MENOMONEE FALLS, WISCONSIN

“Hopefully the tide is finally turning on inflation. The Fed might not find this one report compelling enough to act on, but at least it leaves open a slowdown in the pace of hikes come September.”

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK

“We got some good inflation news. Obviously, we’re seeing some a relief in transitory inflation, including agriculture and oil and things of that nature. But we still see sticky points.

“This is an indication that we’re going in the right direction. Does this raise the possibility of the Fed changing its tune? I suspect not. We should still see a 50 to a 75 basis point (interest) rate hike in September.

“It’s good news for the stock market. Stock futures are up, yields are down sharply.

“Technically speaking, we’re in a recession. A peculiar one, but a recession. Remember, that if the Fed raises rates in September, that’s just going to slow the economy even further.

“The consumer is getting some relief. Gas prices are coming down, food prices are beginning to stabilize, so that’s good news for the consumer.

“We’re having some relief from the war effect, we’re seeing that in energy, in grains and wheat.”

STEVEN RICCHIUTO, U.S. CHIEF ECONOMIST, MIZUHO SECURITIES USA LLC, NEW YORK

“The market reaction to the details is more correct than incorrect. The details show some pretty big declines in components like air fares, hotels, energy. It also shows some nice declines in used car prices. All of that was better than expected, pulling it down.

“This is part and parcel of what happens when you have an index of lots of things, you have very little information ahead of time for what is forecasted. The big surprise to us was the energy pulldown. But again, people were expecting that more than we were. We thought the energy would be a little bit on the higher side.

“When you look at the numbers it tells you inflation probably peaked in the month of June. Is it settling rapidly enough for the Federal Reserve? My view continues to be that the Fed needs to see a 3 percent point deceleration from the peak, and the peak in the headline number was 9.1%. You need it to come down into the 6’s at least for them to say they have a substantive decline, and you’re at 8.5%.”

(Compiled by the Finance and Markets Breaking News team)

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