Dow rallies 400 points as July inflation report bolsters expectations Fed is done hiking rates

What’s driving markets

U.S. consumer prices rose by 0.2% in July on both a headline and core basis, excluding food and energy prices, both of which were in line with economists’ expectations, according to the latest consumer-price index report from the Department of Labor.

However, on a year-over-year basis, headline prices rose by 3.2%, which was lower than 3.3% forecast by economists polled by The Wall Street Journal, but higher than the 3% reading from the prior month. That marked the first re-acceleration in 13 months. Meanwhile, an increase in core inflation, excluding food and energy prices, over the past year slowed a tick to 4.7% from 4.8%, the lowest rate in almost two years.

Analysts scrutinizing the details of the report generally determined that it would boost the Fed’s case for leaving interest rates on hold in September.

Economists noted declines in both used and new car prices in July, while dismissing a 7.7% year-over-year increase in shelter prices, reasoning that slower growth in rents in July would help ameliorate price pressures in an area that is being closely watched by the Fed.

Based on how individual categories are weighted in the overall CPI data, the cost of rent and housing accounted for more than 90% of the increase in consumer prices last month.

“Overall, the underlying details of the July CPI inflation data are consistent with ongoing progress on disinflation,” said Gurpreet Gill, global fixed income macro strategist at Goldman Sachs Asset Management, in emailed commentary.

“Although core services inflation trended higher on the month, other component-level trend are evolving in line with our expectations. In particular, rents and used car prices softened, alongside clothing and airfares.”

Traders now see less than 14% chance of a September rate rise by the Fed, which was little-changed after the CPI data but down from more than 20% a week ago, according to the CME’s FedWatch tool.

One analysts said the data could help to reverse some of stocks’ August slump.

“Today’s inflation report is good news for a market that’s seen profit taking and worries about summer volatility,” said David Russell, vice president of market intelligence at TradeStation.

In other economic news, the latest reading on unemployment claims showed the number of Americans applying for unemployment benefits increased last week by 21,000 to 248,000.

Treasury yields, which have been in focus for stocks lately, were little-changed on the day in recent trade as an initial kneejerk decline after the release of the CPI data faded.

The yield on the 10-year Treasury note
BX:TMUBMUSD10Y
was marginally lower at 4.002% after falling as low as 3.95% shortly after the inflation data were released at 8:30 a.m. Eastern Time.

The U.S. dollar also weakened, with the ICE U.S. Dollar Index
DXY
off 0.2% at 102.28.

Companies in focus

• Walt Disney Co. shares
  DIS,
  +2.37%
  rose after the media giant reported a mixed third-quarter and said it will raise prices on almost all of its streaming packages in an aggressive push to boost profit.

• Capri Holdings shares
  CPRI,
  +56.20%
  jumped after Tapestry
  TPR,
  -13.09%,
  the owner of Coach, announced a deal to buy the company, the parent company of Michael Kors, Jimmy Choo and Versace. 

• Plug Power Inc. stock
  PLUG,
  -12.84%
  dropped after the alternative-energy company saw losses for the second quarter increase more than Wall Street expected.

• Alibaba Group Holding Ltd.
  BABA,
  +5.35%
  rose after the Chinese e-commerce giant topped expectations with its latest revenue and earnings.

• Roblox Corp.
  RBLX,
  +2.14%
  shares rose modestly, paring some of a post-earnings decline.