Confident in weakening inflation! US stocks and bonds rise together, welcoming tonight's US CPI

Inflation cooling strengthens rate cut confidence, the U.S. market is jubilant, with both U.S. stocks and U.S. bonds rising.

The overnight release of the U.S. July PPI exceeded expectations across the board, with service costs declining for the first time this year, proving that the inflation situation has reversed, and the market's expectations for a Fed rate cut are increasing; this week will see the release of the second heavyweight inflation data of the week - the July CPI. Market expectations are generally that if inflation continues to show signs of slowing down, the Fed may adopt a more accommodative monetary policy stance.

Boosted by this news, U.S. stocks and bonds rose together, with U.S. stocks closing at daily highs, the S&P 500 index up nearly 1.7%, the Nasdaq up over 2%, and tech giants leading the gains.

U.S. Treasury bonds rose across the board, with a larger drop in short-term bond yields, which are more sensitive to interest rate policies. Citigroup strategist David Bieber stated that the current bullish sentiment for U.S. bonds remains strong, and the market "remains bullish tactically and structurally."

The number of open positions in U.S. Treasury futures has been rising in the past few trading days, and in the spot market, Morgan Stanley's survey of bond clients shows that clients' net long positions have reached their highest level since December last year.

Weak PPI is good for a September rate cut, weak CPI may support further rate cuts

The U.S. July PPI fell more than expected, rising only 0.1% month-on-month, below the expected 0.2%, and up 2.2% year-on-year; the core PPI, excluding energy and food, rose 2.4% year-on-year, lower than the expected 2.6% and the previous value of 3%; it remained flat month-on-month, the lowest level in four months.

The PPI proves favorable for a rate cut, and the market has fully priced in a 25 basis point rate cut in September, while also reflecting some bets on a 50 basis point rate cut.

In response, Wall Street is also optimistic about the prospect of a rate cut in September. Harris Financial analyst Jamie Cox said:

The momentum for a Fed rate cut in September is clear, if this data continues, the Fed will have enough room to further cut rates this year.

Evercore analyst Krishna Guha confidently pointed out,

There is "no threat" in the latest PPI data, what's more important here is that we have passed a stage where changes in inflation by a few basis points month-on-month will not have a substantial impact on Fed policy and rate prospects. Currently, Fed policy and rate prospects will be mainly influenced by labor market data.

TradeStation analyst David Russell stated:

The PPI data further proves that the inflation situation has reversed, especially in the service sector. Due to economic weakness putting pressure on commodity prices, this process may continue or accelerate in the coming months.

Deutsche Bank's Chief U.S. Economist Matt Luzzetti stated after the PPI release:

The market is moving in a very dovish direction, expecting weak inflation data, which will allow the Fed to start cutting rates.

For Ian Lyngen of BMO Capital Markets:

Tuesday's data showed no signs of the Federal Reserve hesitating on whether to cut interest rates next month, although tonight's CPI inflation is more relevant to recent policy expectations