S&P 500 Rises as Soft CPI Cuts July Fed Hike Odds to 20%

Q: With inflation cooling but risks remaining, will the Fed ignore the market and hike rates in July?

A July rate hike looks unlikely, but it cannot be ruled out. The market’s sharp repricing after the cooler inflation report is meaningful: two-year Treasury yields posted their biggest one-day drop since February, and swaps cut the implied odds of a July hike to about 20% from above 40%. That shows investors now think the Fed has less reason to tighten immediately. Still, the Fed is not bound by market pricing. At its June meeting, officials kept rates at 3.50% to 3.75% but signaled that inflation risks were still tilted upward. Policymakers cited tariffs, Middle East tensions, energy prices and strong demand as reasons inflation could stay sticky. The June projections were also hawkish, with nine of 18 officials expecting at least one hike this year. That leaves July as a live but lower-probability meeting. A single softer inflation print is unlikely, by itself, to overturn the Fed’s broader concern that price pressures could reaccelerate. Much will depend on incoming data before the July 28-29 meeting, especially core inflation, labor-market readings and any energy-driven price shock. Chair Kevin Warsh’s communication shift also matters. By stepping back from strong forward guidance, the Fed has made clear it wants markets to react to data, not assume a preset path. That means officials could still surprise investors if they judge inflation risks remain too high. For now, the most likely outcome is a hold in July with a tightening bias, rather than an outright hike.

3 articles · Updated · Bloomberg · Jul 14

Treasuries and stocks climbed after cooler-than-expected CPI data eased fears of an imminent Federal Reserve rate increase, pushing the 10-year Treasury yield down five basis points to 4.57%.
Money markets cut the implied probability of a July Fed hike to 20%, even as US crude topped $80 and revived concern that energy prices could reheat inflation.
The S&P 500 extended its July advance, with chipmakers leading gains and offsetting software weakness after IBM missed sales estimates.
Big banks opened earnings season with solid results, adding support to a market rally now driven by softer inflation and reduced pressure for tighter policy.