Market Takes Comfort in Latest CPI Reading

Investors are More Optimistic Than the Fed that Prices Have Reached Heights.

 Market Takes Comfort in Latest CPI Reading

A recently published consumer-price index report indicated slight cooling in inflation, comforting investors and prompting more bets that prices have reached their peak. A U.S. Labor Department report showed consumer prices didn't rise in July.

The July consumer-price index boosted renewed sentiments that inflation is more circumstantial than structural and that the Federal Reserve will keep back on rapid rate hikes. Investors are now expecting only a half-point interest-rate increase in September instead of 0.75%, and have ramped up buying shares of tech companies.

Tech stocks have soured, sending the Nasdaq index up 23% since mid-June. Earlier in the year, rising rates had inflicted pain on the index by depressing the investment appeal of hi-tech companies with far-off potential for profit. Treasury yields, which mainly reflect expectations for interest-rate policy, have fallen. The 10-year yield settled Friday, August 12 at 2.848%, down from a peak of 3.482% in June.

Despite the comforting stock market signals marking the year’s best stretch of gains in July-August, Fed officials are still alerting about the need for further rate increases, which could erase stock and bond markets’ recent gains. Regardless of the inspiring news in the CPI report, the Fed is "far, far away from declaring victory" on inflation, Minneapolis Federal Reserve Bank President Neel Kashkari was quoted by Reuters as saying at the Aspen Ideas Conference last week. The executive said he hasn't "seen anything that changes" the need to raise the Fed's policy rate to 3.9% by year-end and 4.4% by the end of 2023.

The rate is currently in the 2.25%-2.5% range.

While there is still a fair amount of uncertainty about how the Fed will interpret the most recent economic data in the light of likely economic outcomes, some portfolio managers caution investors against chasing the rally. “We expect renewed market volatility ahead, and we continue to recommend positioning portfolios for resilience under various scenarios,” CNBS quoted Mark Haefele, chief investment officer at UBS Global Wealth Management as saying.

“I think what the Fed is telling us is correct: The job is not done,” Michael Sewell, a fixed-income portfolio manager at T. Rowe Price said to Wall Street Journal.

“I think the market’s been interpreting Powell’s comments the way they want to, instead of the way Powell intended them to be interpreted,” said Gautam Khanna, a portfolio manager at Insight Investment, part of BNY Mellon.

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