Signs that US taxes on imports have not fully filtered into headline consumer prices sparked a relief rally on Wall Street in the previous session, with the benchmark S&P 500 marking its first record high close in two weeks.
Despite core inflation marking its biggest jump since the start of the year, investors factored in recent weakness in the job market and a shake-up at the Fed as they leaned in favour of a potential dovish move by the central bank in September.
Interest rate futures now reflect a 98% chance of a 25 basis points interest rate cut, according to data compiled by LSEG, compared with 88.8% yesterday.
The central bank last lowered borrowing costs in December.
“The US inflation reading was in line with market expectations, and the downside risks in the labour market are likely to outweigh inflation concerns,” said Mark Haefele, CIO at UBS Global Wealth Management.
“Our base case remains that the Fed will resume rate cuts at the September meeting and continue cutting for a total of 100 bps,” Haefele said.
At 5.35am, Dow E-minis were up 104 points, or 0.23%, S&P 500 E-minis were up 11.5 points, or 0.17% and Nasdaq 100 E-minis were up 54.25 points, or 0.23%.
The CBOE volatility index, popularly referred to as Wall Street’s fear gauge, dropped to 14.55 – its lowest since January.
Rate-sensitive banking stocks such as Bank of America and Citigroup were marginally higher in premarket trading after the broader sector logged its biggest daily rise in three months yesterday.
Analysts said a steepening yield curve following the inflation report could help bank earnings as lenders could borrow cheap and lend at a higher rate.
Nomura was the first among brokerages to bring forward its easing forecast after the data and now expects the Fed to ease interest rates by 25 basis points in September.
Later in the day, investors will weigh in on the remarks of a number of policymakers, especially Chicago Fed president Austan Goolsbee – a federal open market committee voting member this year.
Earnings are also in focus. CoreWeave, which is backed by Nvidia, lost 9.2% after the AI data centre operator reported a bigger-than-expected net loss.
Investors were also keeping an eye on developments on the China revenue-sharing deal the US government signed with chip companies such as Nvidia and Advanced Micro Devices that the White House said could be expanded to other companies in the sector.
Venture Global gained 9.3% after the liquefied natural gas (LNG) major won a legal battle against Shell over its failure to deliver LNG under long-term contracts starting in 2023.
Crude prices traded around US$60 per barrel ahead of a virtual meeting between Donald Trump and European leaders on the Russo-Ukraine conflict, two days before the US president meets Russian President Vladimir Putin.