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Market Wrap: Yields Decline as CPI Raises Potential for September Fed Rate Cut

The world’s largest bond market saw a strong rally as signs of disinflation reinforced expectations that the Federal Reserve could soon cut interest rates.

Treasury yields fell across the curve, with Fed swaps now pricing in more easing in 2024 — nearly fully anticipating a rate reduction in September. Equities struggled for traction in early trading after the S&P 500’s longest rally of the year raised concerns about an overbought market. Additionally, disappointing corporate outlooks weighed on stocks.

The core Consumer Price Index, excluding food and energy costs, rose by 0.1% from May, marking the smallest increase since August 2021, according to Bureau of Labor Statistics data released Thursday. On a year-over-year basis, the measure climbed 3.3%, the slowest pace in over three years.

“July remains unlikely, but today’s CPI, favorable for the Fed, brings the market closer to a September rate cut,” said Chris Larkin of E*Trade at Morgan Stanley. “Much can change between now and September, but unless data predominantly shift back into ‘hot’ territory, the Fed’s rationale against rate cuts may diminish.”

The yield on 10-year Treasuries dropped by nine basis points to 4.20%. S&P 500 contracts fluctuated, while the dollar declined against major peers.

In corporate news:

  • Delta Air Lines Inc. projected a quarterly profit below Wall Street estimates due to intense domestic market competition lowering ticket prices.
  • Pfizer Inc. is advancing with a weight-loss pill to tap into the lucrative obesity medication market.
  • Apple Inc. avoided EU fines by committing to open its mobile wallet technology to other providers for free over the next decade.
  • Costco Wholesale Corp. raised its membership fees for the first time since 2017.
  • Royal Bank of Canada reorganized its leadership and split its largest division in a significant restructuring under CEO Dave McKay.
  • Tata Consultancy Services Ltd. reported higher-than-expected profits, indicating increased corporate spending on technology projects like artificial intelligence.

Key upcoming events include China trade data and the University of Michigan consumer sentiment and US PPI releases on Friday.

Market movements:

  • S&P 500 futures, Nasdaq 100 futures, and Dow Jones Industrial Average futures were all relatively unchanged.
  • The Stoxx Europe 600 rose 0.4%, while the MSCI World Index gained 0.3%.

Currency markets:

  • The Bloomberg Dollar Spot Index declined 0.6%.
  • The euro and British pound both rose against the dollar, with the yen also strengthening significantly.

Cryptocurrency and bond markets:

  • Bitcoin and Ether prices rose.
  • Yields on 10-year Treasuries, Germany’s and Britain’s 10-year bonds declined.

Commodities:

  • West Texas Intermediate crude and spot gold prices increased.

This report was generated with assistance from Bloomberg Automation.

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