〔Day Digest〕Benign Inflation Curbs Fed Rate-Hike Bets, but Treasury Market Sends Cautionary Signal

Inflation Data Gives Fed Breathing Room

July core CPI rose 0.2% month over month and 2.5% year over year, matching expectations ^[1]. The report was neither cold enough to remove a September hike entirely nor hot enough to force the Fed into action, giving policymakers breathing room before the September 15-16 meeting ^[1]. CME data showed market odds of a September hike fell below 50% after the CPI release ^[1]. July producer prices were unchanged, further reducing expectations for a rate hike and helping tech stocks push the S&P 500 to an intraday record high ^[2]. A conversation about a Fed rate hike has gotten quieter ^[3].

Fed Officials Split on Next Move

Richmond Fed President Tom Barkin said it is still not clear the Fed will have to raise rates to restore inflation to 2%, citing several reasons to think price pressures will ease on their own ^[4]. Cleveland Fed President Beth Hammack reiterated her view that the Fed should raise rates immediately to bring down too-high inflation and restrain business growth and investment ^[5]. Because inflation is not decisive, the outcome of the next few meetings roughly amounts to a coin toss, according to Renaissance Macro analyst Neil Dutta ^[1]. The internal hawk-dove divide remains unresolved, leaving the September meeting outcome uncertain ^[1].

Treasury Market Flashes Caution

Despite softer inflation data, fixed-income traders showed signs of unease, with aggressive bond vigilantes seemingly still voting with their feet in an attempt to force the Fed to hike ^[6]. The Treasury's $42 billion 10-year auction was the biggest bond-market focus after CPI, with a high yield of 4.683%, the highest since 2007 and slightly above the pre-auction market level, and the first tail since May ^[6]. The US is set to pay the most for 30-year debt in a quarter of a century after a historic selloff ^[7]. Concerns include US fiscal spending that is more than half borrowed, with recession trades potentially returning ^[8]. Morgan Asset Management said it prefers bonds outside the US given Fed and economic data uncertainty ^[9].

Global Markets: Equities Rally, Dollar Steadies, Gold Pulls Back

An AI trading revival lifted Asian stocks, with the MSCI Asia Pacific index up about 1%, the Nikkei 225 up 1.2%, and the KOSPI briefly up more than 4.8% and more than 22% above its July 30 low, entering a technical bull market ^[10]. Samsung Electronics and SK Hynix both rose more than 4%, driven by AI capital-expenditure strength and tight storage supply ^[10]. European stocks advanced as US inflation data eased Fed rate concerns ^[11]. US stock futures were mixed to slightly higher, with Dow futures rising ^[12][13][14]. The dollar steadied after benign inflation curbed Fed rate-hike bets ^[15][16]. Gold pulled back from a two-month high as markets reassessed the Fed rate outlook ^[17]. Oil prices dropped on higher inventories and lower global demand forecasts ^[2]. South Africa's rand was steady as Fed rate-hike bets shrank ^[18]. AI has crept onto the Fed's radar, but its footprint remains small so far ^[19].