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The Consumer Price Index (CPI) saw a cooler-than-anticipated annual headline print in July, continuing the disinflationary trend and supporting market hopes for large interest rate cuts by the Federal Reserve.
In July, the average price increase for a basket of goods and services tracked by official statistics reached 2.9% year-over-year, slightly below economist forecasts of 3%. This latest inflation reading marks the fourth consecutive decline in the annual inflation rate and smallest inflation uptick since March 2021.
Before the release of July’s inflation data, traders had assigned equal odds —50% each — for the likelihood of a 50-basis-point rate cut or a smaller 25-basis-point cut by the Federal Reserve in September.
The cooler-than-expected CPI reading is likely to support expectations for a larger rate cut while trimming the probability of a more modest 0.25% reduction.
The market reaction to the inflation data was relatively muted, with S&P 500 futures up 0.1% by 8:34 a.m. ET, while Nasdaq 100 futures were flat.
In response, Treasury yields slightly increased, with the 10-year yield adding 2 basis points to 3.87% and the rate-sensitive two-year yield adding 5 basis points to 3.98%.
This comes after a strong session on Wall Street in which the SPDR S&P 500 ETF Trust (NYSE:SPY) gained 1.6% and the Invesco QQQ Trust (NASDAQ:QQQ) rallied 2.5% on Tuesday.
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