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Stocks climb, yields fall with dollar on inflation data

Stocks surged and bond yields fell as softer-than-expected inflation data fueled bets the Federal Reserve could pivot to a smaller pace of hikes -- a view taken with a grain of salt by market watchers saying officials may still be a long ways from achieving their goal.


Traders went risk-on Wednesday, with the S&P 500 on pace for its highest level since May. A surge in the Nasdaq 100 drove the tech-heavy gauge about 20% above its June low. The Cboe Volatility Index slumped below 20, a level last seen in April. The dollar dropped against all of its Group-of-10 peers. Short-dated Treasury yields led the slide, with the two-year rate at one stage plummeting nearly 20 basis points to 3.07%.


For a market plagued by fears about the Fed’s struggles to tame sky-high inflation, the July consumer price index brought a sigh of relief -- with both core and overall measures coming in below forecasts. Swaps are now suggesting a move of 50 basis points as more likely in September than a repeat of the 75-basis-point increases that officials have opted to implement at their past two meetings.


“This is overall good news for risky assets,” wrote Florian Ielpo, head of macro at Lombard Odier Asset Management, adding that “a lower growth rate of prices does not mean the end of inflation, and naturally the end of hawkish central banking. Inflation remains a situation that requires the Fed’s attention and more importantly the Fed’s measures.”


Indeed, the CPI surprise is just one piece of the intricate puzzle officials are playing with at the moment -- and possibly over the next several months -- with the central bank still miles away from reaching its inflation target. One danger of all the stock-market bullishness right now is that could cause a relaxing in financial conditions that would actually go against the Fed’s goal of taming price pressures.rrently running at four-decade highs.


“The Fed will be looking at today’s number with a sigh of relief. But it is not enough to convince them to take their foot off the brakes. The Fed still has significantly further to tighten and the US economy ultimately cannot avoid its fate. Enjoy today and the next few weeks, it won’t last for too long,” said Seema Shah, chief global strategist at Principal Global Investors.


“The market is now pricing in a 50 basis point move at the September meeting and equities are responding in kind. This data point will fuel talk of a policy pivot. But, for me, the issue really does boil down to the labor market. Wage growth is running red hot and absent a turn around in productivity, this will ultimately fuel higher prices,” Neil Dutta, head of economics at Renaissance Macro Research.


“This is a step in the right direction but keep in mind we have many miles ahead of us before inflation normalizes. One month’s data point does not make a trend, however, so cautious optimism is likely the name of the game,” Mike Loewengart, managing director of investment strategy at E*Trade from Morgan Stanley.


“Wow, finally the anecdotal evidence that inflation was easing has finally showed up in a mainstream inflation report. The Fed is rapidly losing its case for further tightening and this report reinforces for investors that either a new easing cycle has already begun or we are getting very close to one,” said Jim Paulsen, chief investment strategist at the Leuthold Group.


In corporate news, Tesla Inc. climbed after Elon Musk offloaded $6.9 billion worth of stock in the electric-vehicle maker, saying he wanted to avoid a sudden sale in the event he’s forced to go ahead with his deal to acquire Twitter Inc.

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