Daily Market Color

Treasurys, Stocks Gain on Weak Consumer Price Data

With inflation being a critical factor in the Fed’s plans to unwind its monetary accommodation, the Labor Department’s reporting of the Consumer Price Index for July took center stage today.  Both overall and core CPI rose a marginal 0.1% last month, marking a fifth consecutive month of missing expectations.  Compared to a year earlier, headline and core CPI rose 1.7%; below the Fed’s 2% target.  The most notable declines in prices included a record 4.2% drop in lodging away from home and a 0.5% fall in vehicle prices.  Overall, the report casts further doubt on the view that the past few months’ weak inflation levels were “transitory” as described by the recent commentary of Fed officials.  Speaking to a community bankers’ forum earlier today, Federal Reserve Bank of Minneapolis President Neel Kashkari compared the fear of accelerated inflation to a “ghost story”, in which the case for wage growth causing a steep increase in consumer prices was something that he could not prove wouldn’t happen, but at the same time lacks evidence to believe that it will.  Fed fund futures now point to a less than 30% probability of a rate hike by the FOMC before year end.  Next Wednesday, investors will gain further insight into the Fed’s plans for future rate hikes and balance sheet normalization with the release of the minutes from July’s meeting.



The risk-off sentiment that characterized financial market sentiment for the majority of the week eased slightly in today’s trading session.  US stocks recovered from their steepest drop in two months as all three major indices traded 0.1%-0.6% higher on the day, led by gains in tech shares.  Treasurys experienced a modest rally in response to today’s soft consumer price data and the continued conflict between the US and North Korea.  Yields/swap rates are poised to finish the session down 1-4 bps across the curve.  The yield on the 10-year note is currently near a one-and-a-half-month low of 2.19%, which is 7 bps lower on the week.  The US dollar fell 0.4% on the day against major currencies, highlighted by a 0.5% decline against the euro.  In commodities, WTI crude touched its lowest level in two weeks following a report from the International Energy Agency which displayed reduced global crude demand estimates for the remainder of this year and 2018.  A barrel of WTI crude is currently trading near $48.75.  Gold futures edged higher, up 0.1% on the day to a new two-month high.



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