The release of the US Consumer Price Index (CPI) has shown that inflation has come down more than anticipated. This brought US stock indices up while also providing the market with optimism around the likelihood that the Federal Reserve (Fed) may be more lenient with rate hikes.
Headline US CPI fell to 3.0% from 4.0%
In the United States, the CPI number for the month of June came in below estimates.
Headline CPI has fallen to 3.0% from 4.0% year-on-year, a substantial drop considering the steep effect from the same reading last year, and core CPI year-on-year declined to 4.8%.
This is seen to be positive data in that it shows higher-than-expected declines and in the way the market reacted.
US stock indices rose after inflation news
Following the announcement, US stock indices increased by more than 1%, propelled by declining US Treasury yields. In the session, the 2-year bond dropped 15 basis points.
The market believes that this news could influence the Fed's monetary policy decisions by decreasing the intensity of rate hikes and even eliminating the 25-basis point increase that is anticipated for the end of this month.
Although the market has been fairly upbeat about the data, immediately after the CPI data was released, two FOMC voting members, Kashkari and Barkin, stated the opposite.
They both agreed that there is still a high degree of inflation and that high interest rates are necessary to combat it. As a result, uncertainty persists, and the positive CPI report does not ensure that the Fed will stop raising interest rates right away. In fact, the market indices corrected a significant portion of the day's initial gains later in the session.
Markets now look to Q2 corporate earnings season
Now the market is looking forward to the start of the Q2 corporate earnings season today and seeing what impact it could have on the market. The earnings of a few of the major banks in North America will be released tomorrow.
According to analyst predictions, revenue and earnings per share will both decline from the first quarter of this year.
Forex market’s reaction to report
Once more, the currency market saw the biggest shift yesterday. The US Dollar once again fell sharply, driven down by the decline in market interest rates.
The EUR/USD pair broke above the 1.11 zone for the first time since March 2022.
Technically, it finds its first resistance at the level around 1.1170.
EUR/USD monthly chart. Sources: Bloomberg, Reuters
Key Takeaways
- Headline CPI has fallen to 3.0% from 4.0% year-on-year
- Core CPI year-on-year declined to 4.8%
- US stock indices rose more than 1% after the release
- US Treasury yields fell
- Market hopes data may influence Fed to be more lenient with monetary policy
- Fed officials stated that level of inflation is still high and high interest rates still needed
- Second quarter corporate earnings season starts today
- Dollar fell sharply
- EUR/ USD broke above the 1.11 zone for the first time since March 2022
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