Bonds, Stocks Rally After Encouraging Inflation Report

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Go ahead and cancel that massage appointment, because the latest CPI numbers will surely ease any stress-induced back pain.

On Wednesday, data released by the US Department of Labor showed the pace of inflation cooled considerably in July from June — from 9.1% year-over-year to 8.5%, coming in a touch below consensus projections of an 8.7% jump. On a monthly basis, prices remained flat from June to July. That’s right, 0.0% inflation — the first time that has happened in 25 months.

Inflated Sense of Importance

Inflation has been many things over the last two years. First, with Modern Monetary Theory en vogue, it was an impossibility. Then, it was but just a blip, not registering on most radars with the economy still in pandemic mode. Next, famously, it was “transitory.” Finally, it became the only word in the dictionary.

While the economy remains nowhere near the Fed’s long-term target of 2% inflation — and yesterday’s data will likely not cause the Fed to deviate from its rate-hiking warpath — markets enjoyed a massive relief rally yesterday on the notion that ‘peak inflation’ is in the rear-view mirror:

  • The Nasdaq Composite, home to the fast-growing (and often money-losing) tech companies that are most the most sensitive to interest rate hikes, climbed nearly 3% on the day. Since the dog days of mid-June, the index is now up 20%.
  • The inverted yield curve — that dreaded harbinger of recession doom when short-term yields surpass long-term yields — is beginning to look slightly less inverted. Yields on the benchmark 10-year US Treasury note fell around 0.01% to 2.78%, while the more volatile two-year note dropped a more dramatic 0.07% to 3.21% — signaling that investors are beginning to bet on the chance of a soft landing, which truth be told are fairly rare.

The good news has some groups feeling downright giddy. “I think this might be a new bull market as opposed to a bear market rally,” Patrick Spencer, Baird’s equities vice-chair, told the Financial Times, “The Fed will pivot eventually, the rate of increases will have to slow.”

Wait and See: Not everyone is a believer, however. “It’s nice to see a report come in cooler, but we’ll leave the champagne bottles closed for now,” Brian Nick, chief investment officer at Nuveen, told the FT. Blake Gwinn, head of U.S. rates strategy at RBC Capital Markets, told the WSJ it’s still “way too early” to declare victory over inflation. Pessimism, it seems, never goes out of style.