Wall St rises as cool CPI offsets geopolitical risk, banks beat
A cooler-than-expected June inflation print pushed US equities higher and sharply reduced bets on an imminent rate hike, even as Middle East tensions and mixed bank earnings kept investors cautious.
US stocks closed higher after a softer-than-anticipated inflation report significantly altered interest rate expectations. The S&P 500 rose 28.69 points, or 0.38%, to 7,544.03, while the Nasdaq Composite outperformed, gaining 236.48 points, or 0.91%, to 26,109.65 on a rebound in semiconductor shares. The Dow Jones Industrial Average lagged, edging up 28.92 points, or 0.05%, to 52,527.56.
The rally was primarily driven by Labor Department data showing consumer prices cooled more than analysts forecast in June. The moderation was largely attributed to easing energy costs, which benefited from early signs of progress in U.S.-Iran peace negotiations.
However, the inflation data conflicts with an escalating military situation in the Middle East. Ramped-up airstrikes between the United States and Iran over control of the Strait of Hormuz have pushed crude oil prices higher, reviving underlying fears of upward price pressures. This geopolitical volatility framed the first congressional testimony of Federal Reserve Chair Kevin Warsh since his confirmation.
Despite the energy risks, the CPI data prompted a sharp repricing of Fed policy. Financial markets are now pricing in an 83.4% probability that the central bank will hold its key interest rate at its July meeting, a significant increase from 58.3% on Monday. Still, CME's FedWatch tool indicates traders anticipate at least one 25-basis-point hike before the end of the year.
"The inflation report seems to have weakened the argument that the Fed is going to raise rates," said Chuck Carlson, chief executive at Horizon Investment Services in Hammond, Indiana. "It gives the Fed cover, for now." He added that Warsh's messaging reassured lawmakers: "(Warsh) is saying we can bring down inflation, and that's what the people he was speaking to want to hear. And maybe inflation is going to come down without having to raise rates."
Second-quarter earnings season kicked off with five major US lenders reporting solid overall results. Goldman Sachs surged past profit expectations, supported by a pickup in dealmaking and a trading desk that benefited from geopolitical uncertainties. JPMorgan Chase and Bank of America also advanced after delivering consensus-beating profits.
Not all banks were rewarded. Citigroup slid as concerns about rising expenses overshadowed a profit beat, while Wells Fargo posted a decline. The divergent reactions among the major lenders highlight a market focused on cost discipline even as top-line trading and advisory revenues show resilience.
