The U.S. Labor Department’s Consumer Price Index (CPI) revealed that the annual inflation rate dropped by 0.4 percentage points to a cooler-than-expected 2.5 percent. This marks the lowest year-over-year increase since February 2021, following a 2.9 percent rise in July.
In contrast, the core measure—excluding food and energy—recorded a monthly gain of 0.3 percent, surpassing expectations, and an annual increase of 3.2 percent.
Market reactions
Analysts suggest that this report indicates core inflation remains a concern, likely paving the way for a quarter-point rate cut from the Federal Reserve. Others have noted that a 25-basis point cut is widely anticipated in the coming week, prompting markets to weigh the advantages of lower rates against the implications of a weakening economy.
Wall Street performance
On Wall Street, an earlier sell-off reversed, leading to a positive close on Wednesday. Brent crude prices also bounced back from 3.5-year lows as the CPI report reinforced expectations of a 25-basis point rate cut by the U.S. Federal Reserve next week. By mid-afternoon, all three major U.S. stock indexes had shifted from decline to rally, with tech stocks, especially semiconductor firms, significantly outperforming, putting the Nasdaq in the lead, according to Reuters.
Fed rate cut expectations
Currently, financial markets have priced in an 85 percent likelihood that the Fed will reduce its key policy rate by 25 basis points at next week’s meeting, with only a 15 percent chance of a larger 50 basis point cut, as per CME’s FedWatch Tool.
Stock index movements
The Dow Jones Industrial Average climbed 124.75 points, or 0.31 percent, reaching 40,861.71. The S&P 500 rose by 58.6 points, or 1.07 percent, to 5,554.12, while the Nasdaq Composite increased by 369.65 points, or 2.17 percent, to 17,395.53.
European market trends
In Europe, stocks closed mostly unchanged as investors turned their attention to the European Central Bank’s upcoming rate decision on Thursday. The pan-European STOXX 600 index edged up 0.01 percent, and MSCI’s global stock gauge gained 0.62 percent. However, emerging market stocks fell by 0.37 percent, with MSCI’s broad index of Asia-Pacific shares outside Japan down 0.24 percent and Japan’s Nikkei declining by 1.49 percent.
Treasury yields and currency movements
Yields on 10-year U.S. Treasury notes stabilized after an earlier drop, during which the benchmark rate reached its lowest point since June 2, 2023. The 10-year notes last fell 5/32 in price, yielding 3.6609 percent, compared to 3.644 percent late Tuesday. The 30-year bond dropped 12/32 in price, yielding 3.9743 percent, up from 3.954 percent late Tuesday.
Dollar performance post-data
The dollar saw a slight increase against a basket of global currencies following the inflation data, which seemed to confirm a smaller, 25 basis point interest rate cut. The dollar index rose by 0.08 percent, with the euro slipping 0.04 percent to $1.1015. The Japanese yen strengthened by 0.04 percent against the dollar at 142.40, while Sterling traded at $1.3042, down 0.28 percent for the day.
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