US inflation slows by more than expected, traders unwind rate hike bets
Dollar retreats, stock markets party, but bonds and gold not buying it
Disney reports decent earnings, producer price data coming up next
Expectations that inflation in America may have peaked already went into overdrive yesterday following a cooler-than-expected CPI reading. Consumer prices were flat in July from the previous month, with declines in energy products and used cars neutralizing increases in food and rents.
A sense of relief immediately engulfed global markets. Traders interpreted the softer inflation numbers as easing the pressure on the Fed to roll out more shock-and-awe rate increases, pushing the implied probability for another three-quarter-point move in September back down to 40%, around where it was before last week’s jobs report.
That was just what the doctor ordered for equities, which enjoyed a rally of around 2%, drawing power from hopes that a soft landing is still possible with inflation losing its kick while the labor market remains healthy. The buying frenzy saw the Nasdaq close more than 20% higher from its lows, as hedges were axed and implied volatility collapsed, although it is difficult to view this as a fresh bull market in a regime where inflation continues to eclipse earnings growth.
Dollar retreats, gold defies the playbook
In the forex arena, speculation that the Fed might ease off the brakes dealt a severe blow to the US dollar. The Japanese yen and the British pound capitalized the most on the greenback’s troubles, with the yen cheering the compression in short-term rate differentials whereas sterling rode the wave of risk sentiment.
Euro/dollar edged higher as well but was ultimately rejected by 1.0360, a region that also encompasses its 50-day moving average, with a little help from some Fed officials that came out in droves to assure investors that they are still very far from declaring victory on inflation. That was the unified message from Evans, Daly, and even Kashkari, who used to be the FOMC's arch-dove.
The bond market sided with them. Yields at the long end of the curve quickly recouped all their losses to trade even higher despite a solid 10-year Treasury auction, amid a realization that inflation is still running at more than four times the Fed’s target. In turn, this dynamic took its toll on gold. With long-dated yields completely shrugging off the softer CPI readings and then some, the force of gravity saw gold erase its initial gains to close the session in the red.
There is a conflict of narratives playing out in different asset classes, with forex and equities hailing this dataset as the beginning of the end in the inflation battle, whereas bonds and precious metals are not really buying it.
Producer prices coming up
As for today, the spotlight will turn to the latest batch of producer prices from the US, which will help calibrate market expectations around how inflation will evolve in the coming months. Commodity prices continued to retreat in July while supply chains healed, and the PPI is expected to reflect those improvements.
In corporate news, Disney shares are up almost 8% in pre-market trading after the entertainment conglomerate reported earnings that blew estimates out of the water across every metric. Most importantly, the streaming service continues to add subscribers at an impressive speed, fueling hopes that Disney will be among the last companies standing in the streaming wars.
Finally in geopolitics, the latest reports suggest that China’s recent military muscle-flexing around Taiwan is leading the White House to reconsider earlier plans to lift some of the Trump-era tariffs imposed on Beijing.