New York, Aug. 10 (BUS): Wall Street fell on Wednesday after inflation calmed more than expected last month, fueling speculation that the Federal Reserve may not be as aggressive about raising interest rates as feared, according to the Associated Press.
Much of the slowdown in inflation in July was due to lower gasoline and oil prices. But even after ignoring that and volatile food prices, so-called “core inflation” held steady last month rather than accelerating as economists expected.
The data encouraged traders to scale back bets on how much the Federal Reserve will raise interest rates at its next meeting.
And they now see a half-percentage-point rise as the most likely outcome, according to CME Group. The day before, they were betting on an even fiercer rise of 0.75 percentage points, the same as the last two increases.
These differences may not seem like much, but interest rates help determine the direction of prices across financial markets. Higher rates tend to drive down the prices of everything from stocks to commodities to cryptocurrencies.
Bond prices rose immediately after the release of the inflation report, which lowered their yields. The yield on the two-year Treasury, which tends to follow the Fed’s expectations, fell to 3.10% from 3.27% late Tuesday.
The 10-year yield has fallen more slowly, falling to 2.74% from 2.78%, narrowing the lower range of the two-year yield. Many investors see this gap as a fairly reliable sign of an upcoming recession.
Recession fears have piled up as the highest inflation in 40 years puts pressure on households and businesses around the world.
The Fed and other central banks have raised interest rates to slow the economy in hopes of stamping out inflation, but they risk choking it if they move too aggressively.
To be sure, inflation remains painfully high, and is expected to remain so for a while. But Wednesday’s data nonetheless renewed Wall Street, which faltered after a stronger-than-expected jobs report on Friday raised expectations for the Federal Reserve even more robust.
It raised hopes that peak inflation – and thus more aggressive interest rate hikes by the Federal Reserve – might be on the horizon.
The Federal Reserve will get a few highly-anticipated reports before its upcoming interest rate announcement on September 21, which could change its stance as well. These include reports showing employment trends across the economy due September 2nd and the next update on consumer inflation coming September 13th.
Still, Wednesday’s inflation data helped stocks across Europe climb to modest gains, while markets that closed earlier in Asia were mostly lower. Germany’s DAX is back 1%, Japan’s Nikkei 225 is down 0.6%, and Hong Kong’s Hang Seng loses 2%.
On Wall Street, companies in the housing industry were strong in hopes that a less aggressive Fed would put less pressure on mortgage rates. Home builder DR Horton is up 5.9%, PulteGroup is up 5.9% and Lennar is up 5.2%.
Shares of Netflix, which was previously a high-growth, high-growth that fell to be the worst of the year in the S&P 500, rose 5% although it is still down nearly 60% for 2022.
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