US stocks closed higher on Wednesday after investors cheered cooling inflation data and solidified bets for Fed rate cuts. The Dow Jones Industrial Average and S&P 500 ended the trading session with gains, while the Nasdaq Composite was nearly flat. The 10-year Treasury yield dipped slightly by one basis point to 3.837%.
Consumer prices continued to cool in July, with inflation rising 2.9% on an annual basis, the Bureau of Labor Statistics reported. That’s lower than the 3% yearly price increase recorded in June, and the slowest pace of inflation recorded since March 2021, adding to the case for the Fed to cut interest rates in September.
Markets are pricing in a rate cut next month with certainty. According to the CME FedWatch tool, traders are betting the Fed has a 65% chance of cutting rates 25 basis points and a 36% chance of cutting rates 50 basis points steeper.
„Today’s CPI release effectively rolls out the red carpet for rate cuts to begin in September,“ Jason Pride, Glenmede’s investment strategy and research chief, said in a note, adding that the firm sees four rate cuts by the end of the year.
„While there is still one more CPI report to be seen before the FOMC gathers again, the July report solidified some nascent trends that will likely give them the confidence they need to pare back on tight policy,“ Pride added.
Expectations for Fed easing have spiked over the last month, especially after the job market proved to be unexpectedly soft in July. Unemployment rose to the highest level since the pandemic, fueling concern that high interest rates were pushing the economy in the direction of a recession.
„Together with the recent softening in the labor market, this is supportive of near-term rate cuts from the Fed,“ David Doyle, the head of economics at Macquarie, said of the latest CPI numbers. The firm is forecasting 75 basis points worth of cuts coming by the end of the year.
„The extent and magnitude of easing will hinge on the data flow, with inflation and employment readings taking on particular importance,“ he added.
Alphabet stock dropped in Wednesday’s session, weighing on the Nasdaq. The tech giant fell more than 2% on a report the government is weighing moves to break up the company after a federal judge ruled the Google parent search business is an illegal monopoly.
In commodities, bonds, and crypto, West Texas Intermediate crude oil fell 1.54% to $77.14 a barrel. Brent crude, the international benchmark, inched higher 0.15% to $79.88 a barrel. Gold dipped 0.83% to $2,444 per ounce. The 10-year Treasury yield slipped one basis point to 3.837%. Bitcoin dropped 2.6% to $58,820.
Overall, Wednesday’s session saw US stocks mostly higher as investors digested the lowest inflation reading in three years. With consumer prices rising at a slower pace, the stage is set for Fed rate cuts in the coming months. The only debate in markets now is how deep those cuts will be through the rest of 2024.