Wall Street took its cue Wednesday from a government inflation report that gave policymakers, and investors, at least a partial reprieve. The Consumer Price Index rose 0.1% in July and 3.4% from a year earlier, cooling for a second straight month and landing in line with Wall Street forecasts, according to Bureau of Labor Statistics data reported by CNBC. Core prices, which strip out food and energy, rose 0.2% for the month and 2.5% over the past year, also down a tenth of a point from June.
The S&P 500 added 0.26% to close at 7,748.50, the Nasdaq Composite gained 0.54% to 26,588.49, and the Dow Jones Industrial Average slipped 0.04% to 53,770.27, essentially treading water just below the record high the S&P set earlier this month. Energy prices fell another 1.5% in July after tumbling 5.7% in June, while shelter and food costs each rose a modest 0.1%.
The relief was tempered by what the report did not fix. Inflation remains well above the Federal Reserve's 2% target, and the central bank is still digesting a July jobs report that rattled economists a week earlier: nonfarm payrolls fell by 23,000 rather than rising the 83,000 that had been forecast, the unemployment rate ticked down to 4.1% only because 264,000 people left the labor force, and the participation rate slid to its lowest level in more than five years. The prior two months' job counts were also revised down by a combined 103,000, according to the Labor Department's July report.
A Divided Fed
That combination, cooling growth alongside inflation still running above target, has put the Federal Reserve in an unusually difficult spot heading into its September 15-16 meeting. The central bank held its benchmark rate at a range of 3.50% to 3.75% at its late-July meeting, the fifth straight hold, but three regional bank presidents, Cleveland's Beth Hammack, Minneapolis's Neel Kashkari and Dallas's Lorie Logan, dissented in favor of raising rates instead, arguing that inflation pressures tied in part to Middle East-driven energy costs had not been tamed.
Traders have been pricing in a real chance of a hike ever since. Futures tracked by CME Group's FedWatch tool put the odds of a quarter-point increase at the September meeting at roughly 42% following Wednesday's data, down modestly from where they stood after the hawkish July decision, with much of the remaining probability shifted toward the Fed's October meeting rather than eliminated altogether.
"Affordability is still a serious problem, but it's much better than it has been. If these trends continue, inflation will be within spitting distance of the Fed's target."
Mark Zandi, chief economist, Moody's Analytics
Other economists cautioned against reading too much comfort into the headline figures. KPMG's Diane Swonk pointed to persistent price pressure in services, including medical care, airfares and car repairs, categories less sensitive to the Fed's rate moves and more reflective of stubborn cost growth working through the economy.
Markets Bet on Patience
Energy markets are complicating the picture further. Brent crude traded near $89 a barrel and U.S. benchmark crude near $84 on Wednesday, elevated by a monthslong standoff between the United States and Iran over shipping through the Strait of Hormuz, which Tehran has said will not reopen on Washington's terms. That geopolitical premium has helped keep gold above $4,400 an ounce and pushed silver above $65 for the first time since June, as investors hedge against the possibility that energy costs reignite inflation even as the labor market weakens.
For now, equity investors are wagering that the Fed's easing bias from earlier this year still has more pull than the July dissents suggest, and that a data-dependent central bank facing a softening jobs market will be reluctant to tighten policy further. That bet will be tested repeatedly between now and the September meeting, starting with the next round of retail sales and producer price data due before policymakers gather.
