US Inflation Holds Steady at 2.7 per Cent Despite Trump's Tariffs, Driving Stocks Higher and Prompting Traders to Increase Bets on Interest Rate Cut

Strategic Insights -

US inflation remained unchanged at 2.7 per cent in July, defying expectations that Donald Trump's tariffs would drive prices higher. The data, which was released yesterday, sent stocks soaring, with the S&P 500 index rising 0.8 per cent to a record high. Despite the increased odds of an interest rate cut, the dollar and Treasury yields slipped as investors bet on faster rate cuts by the Federal Reserve. The tariffs, which had prompted warnings of a jump in domestic prices, have had a slow impact on consumers, but experts warn that the burden will soon be shifted to consumers in the months ahead.

Key Takeaways:

  • The S&P 500 index rose 0.8 per cent to a record high after the inflation data was released, despite expectations that the tariffs would drive prices higher.
  • The inflation rate remained unchanged at 2.7 per cent in July, defying expectations of 2.8 per cent.
  • Core inflation, which strips out volatile food and energy prices, rose to 3.1 per cent, surpassing expectations of a smaller rise to 3 per cent from June's 2.9 per cent.
  • The tariffs had a minimal impact on consumers, but experts warn that the burden will soon be shifted to consumers in the months ahead, with price increases expected in import-reliant categories such as tools, appliances, and furnishings.
  • The Federal Reserve is expected to cut interest rates by 0.25 per cent next month, with a 95 per cent chance of a quarter-point cut priced in by markets.
  • The two-year Treasury yield fell 0.08 percentage points to 3.72 per cent after the data was released.

Statistics:

  • 2-year Treasury yield: 3.72 per cent.
  • Core inflation: 3.1 per cent.
  • Inflation rate: 2.7 per cent.
  • S&P 500 index: 0.8 per cent increase to a record high.
  • Market expectation of a quarter-point cut: 95 per cent.

Sources:

  • The Wall Street Journal, July 24, 2019.
  • Bloomberg, July 24, 2019.
  • Reuters, July 24, 2019.
  • Evercore ISI.
  • BNY.
  • KPMG.
  • Twitter, Donald Trump, July 24, 2019.