Dow rises over 150 points after CPI data showed inflation at lowest in more than two years

What’s driving markets

Stocks were rising while Treasury yields
TMUBMUSD02Y,
4.746%

TMUBMUSD10Y,
3.863%
and the U.S. dollar
DXY,
-1.12%
were drifting lower after data on Wednesday showed U.S. inflation at its lowest pace in more than two years.

U.S. consumer prices rose a modest 0.2% in June. Economists polled by the Wall Street Journal forecasted an increase of 0.3%. The yearly rate of inflation decelerated to 3% from 4% in the prior month, marking the lowest level since March 2021.

The so-called core rate of inflation that omits food and energy rose a mild 0.2% last month. That’s the smallest increase in almost two years. Wall Street had forecast a 0.3% gain. The annual rate of core inflation decreased to 5% from 5.3% in the prior month.

See: U.S. inflation slows again, CPI shows, as Fed weighs another rate hike

The markets have been receiving the CPI print “pretty well,” said Brian Katz, chief investment officer at the Colony Group.

The lower-than-expected CPI data is likely to “prolong the uptrend [in stocks] that we’ve been experiencing this year,” Katz in a call. “As long as we are in this environment where disinflation continues and we have reasonable growth, it is a good environment for risk assets,” Katz said.

Inflation in June fell in a majority of the important categories, most notably housing prices, which had been elevated, according to George Mateyo, chief investment officer at Key Private Bank.

“The Fed will embrace this report as validation that their policies are having the desired effect — inflation has fallen while growth has not yet stalled. But it most likely won’t change their mind to raise interest rates later this month,” Mateyo wrote in emailed comment Wednesday. 

See: See how much inflation has raised your cost of living, using MarketWatch’s guide

“Today is those weird days where good news was actually good news for almost everybody,” said Phillip Toews, chief investment officer of Toews Asset Management. However, Toews said one thing that people aren’t necessarily considering is the “potential circuitous pathway” that inflation can follow.

Good CPI readings will potentially allow interest rates to stabilize later this year, making housing and labor market stronger, but that will again have impact on inflation, said Toews.

“Watch out for waves; watch out for multiple spikes,” Toews told MarketWatch in a phone interview on Wednesday. “The risk may be more of a demand-pull situation, which is that you have a lot of strong labor and lot of wealth, and that could be one of the primary things that drives inflation back up again. That’s a real risk here that we’re now full risk-on again, and I think there’s a possibility that it could change in the next three or six months — we see inflation re-emerge.”

Fed-fund futures traders are pricing in an over 92% chance that the Fed will raise its benchmark interest rate by 25 basis points in its meeting later this month, according to CME Fed Watch. They are pricing in a 12.9% likelihood that the U.S. central bank will raise interest rates again in September. That is down from 22.3% a day ago.

There will also be a batch of commentary from Fed officials for the market to contend with on Wednesday. 

U.S. government bank regulators should run a new “high-inflation” stress test to identify at-risk banks and be able to better gauge their capital shortfalls, said Minneapolis Federal Reserve President Neel Kashkari on Wednesday.

“The potential losses banks face today from interest rate risk appear to be more idiosyncratic than systemwide, and this high-inflation stress test would help banks prepare for a worse-than-expected scenario,” Kashkari said, in a blog post and a subsequent panel discussion on bank stability hosted by his regional Fed bank.

Atlanta Fed President Bostic will make comments at 1 p.m. and the Fed Beige Book will be released at 2 p.m. All times Eastern.

Companies in focus

• Domino’s Pizza Inc.
  DPZ,
  +11.69%
  shares were soaring 11% Wednesday after the company announced a deal with Uber Technologies Inc. 
  UBER,
  +0.56%
  that will see Domino’s menu options included on Uber Eats and Postmates apps. 

• Shares of ShiftPixy Inc.
  PIXY,
  -21.76%
  plunged 23.1% after the workforce management software company’s public equity offering valued the stock at a deep discount.

• Lucid Group Inc.
  LCID,
  -11.82%
  shares dropped 11.6% after the company said Wednesday that it delivered 1,404 vehicles during the second quarter, while producing 2,173 vehicles at its Arizona facility. 

• SunPower Corp.
  SPWR,
  +10.03%
  shares jumped 10.7% after Raymond James analyst Pavel Molchanov upgraded the stock to strong buy from outperform.

• Shares of Draftkings, Inc.
  DKNG,
  +5.77%
  gained 5.3% after Bank of America Global Research analyst upgraded its stock to buy from neutral, writing of “accelerating product and revenue momentum” that are “are on the cusp of driving an inflection in margins and profitability.” 

Jamie Chisholm contributed