US equities trim losses after initial dip on cooler CPI report

Prices in the US rose slightly less than anticipated in July, the latest Consumer Price Index report shows. 

The annual rate of inflation is now below 3% for the first time in more than three years. 

Consumer prices increased by 2.9% in the 12 months ending in July, according to the Bureau of Labor Statistics. Analysts had expected a 3% year-over-year increase. Month over month, prices rose 0.2% in July after declining 0.1% in June. 

Odds of a 25 basis point interest rate cut in September from the Federal Reserve jumped to 56% following the release of Wednesday’s report, according to Fed fund futures data from CME Group. On Tuesday, markets were calling for a 47% chance of a cut at the next meeting. 

BTC and ETH initially dropped on the news. Bitcoin lost as much as 4% in the two hours after the CPI report was published while ether slid close to 5%, according to data from Coinbase. 

Even so, Eliézer Ndinga, vice president and head of strategy and business development of digital assets at 21Shares, said interest rate cuts in the fall will help to shift investor sentiment back to risk-on. 

“We expect this to benefit the crypto industry in the long run, particularly if inflationary pressures are maintained in the short-term, which could result in further rate cuts this year,” Ndinga added. “Rate cuts generally lead to more liquidity in the markets, thereby encouraging investors to seek higher returns in risk-on assets, like bitcoin and ethereum.” 

US equities also stumbled at the open before paring losses later in the trading session. The S&P 500 slid as much as 0.5% in the first hour of trading before rallying. The index is now up 0.3% over the session as of 11:30 am ET. 

Similarly, the tech-heavy Nasdaq Composite lost more than 1% in the first hour after the open but was trading flat at time of publication. 

While a hotter inflation print likely would have pushed stocks and risk assets much lower, investors now are left wondering why inflation appears to be cooling, according to Sevens Report Research founder Tom Essaye. If prices are only coming down because economic growth is cooling, markets will not react well in the long term. 

“The bigger question is whether inflation is falling because growth is  stalling,” said Essaye. “If that is true, then falling inflation will turn from  a tailwind to a headwind in the coming months and  you’ll likely hear a term from the past: deflation.”

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