SPY, QQQ Rebound Continues After Soft Inflation Data

The CPI might not be the market mover that it was a year or two ago, but Wednesday’s tame inflation data was welcomed by investors.

The SPDR S&P 500 ETF Trust (SPY) and the Invesco QQQ Trust (QQQ) were trading up by 0.5% midday Wednesday after the government reported that core consumer prices increased by 0.2% from June to July, in-line with what economists were expecting.

On a year-over-year basis, the core CPI was up by 2.9%, the slowest year-over-year growth rate since 2021.

The data confirmed what most investors had already believed—that inflation was sliding toward the Fed’s 2% target, giving the central bank room to cut interest rates in September. 

With inflation less of a concern, the CPI, as well as the Fed’s preferred inflation measure, the core PCE price index, have become less impactful.

Instead, investors have shifted their focus to the jobs report and other economic growth indicators to get a sense of how the economy is faring and what the Fed might do. 

September Interest Rate Cut

Nevertheless, Wednesday’s tepid inflation reading reinforces expectations of a September Fed rate cut, though they don’t add any clarity to whether the central bank will slash its federal funds rate by 25 basis points or 50 bps.

Ahead of the CPI data, probabilities based on the pricing of fed funds futures suggest that it was a coin flip whether the Fed would do a smaller or larger cut. Those futures now show a slightly higher probability of a 25 bps move—but not by much.

Expect the odds to shift more significantly following the release of the next jobs report in three weeks. 

Following Wednesday’s rally, SPY is now trading at a mere 3.6% off its all-time high, a significant recovery from the 8.4% decline at its low point last week.

Meanwhile, QQQ is currently down 7.6% from its high, compared to 13.6% at last week’s low.