US Core Inflation Posts First Monthly Decline in Six Years, Easing Fed Rate Hike Bets

U.S. core inflation posted its first monthly decline in more than six years in June, a development that prompted a sharp fall in Treasury yields as traders scaled back bets on a near-term Federal Reserve interest rate hike.

Inflation Cools, Shifting Fed Outlook

The core consumer price index (CPI), which excludes volatile food and energy costs, registered a marginal decline of -0.02% for the month, according to a Reuters report. This pulled the annual core inflation rate down to 2.6%. The decrease was reportedly influenced by falling prices for auto insurance, communication, healthcare, and hotel accommodation.

In response to the data, futures markets have almost entirely priced out the possibility of a Fed rate increase at its upcoming July meeting. Despite the softer reading, Fed Chair Kevin Warsh reiterated the central bank's commitment to bringing inflation back to its 2% target in congressional testimony on Monday.

Mixed Signals from Corporate Earnings

The second-quarter earnings season kicked off with starkly divergent results, particularly in the technology sector. IBM shares plunged 25% in their largest single-day drop on record following a significant earnings miss. The company acknowledged challenges in its transition to AI data centers and noted that client spending on AI was eroding software budgets, a comment that weighed on other software stocks.

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In contrast, financial and semiconductor firms delivered strong results:

• Goldman Sachs saw its stock surge 9% as the bank benefited from market volatility and fees from a recent wave of initial public offerings.
• European chip-equipment manufacturer ASML reported blockbuster results and raised its annual revenue forecast, echoing recent positive sales updates from TSMC and signaling robust demand in the chip sector.

Broader Market Drivers

Geopolitical tensions and international economic data are also influencing markets. Oil prices continued to climb back above $85 a barrel amid ongoing hostilities between the U.S. and Iran. Meanwhile, China reported that its second-quarter GDP growth slowed to a below-forecast 4.3%, though industrial and retail data for June exceeded estimates, leading to a firmer yuan.

Following the inflation report and earnings news, Asian stocks traded higher, and U.S. stock futures pointed to a positive open on Wednesday.