Market Snapshot: S&P 500, Nasdaq struggle for direction, giving back earlier gains after July’s inflation report

U.S. stocks were struggling for direction Thursday afternoon, with earlier gains largely fading, following a July report showing inflationary pressures for consumers remained relatively subdued last month.

What’s happening

The Dow Jones Industrial Average
DJIA
was up 83 points, or 0.2%, to 35,208.
The S&P 500
SPX
rose 3 points, or 0.1%, to 4,470, after briefly turning negative.
The Nasdaq Composite
COMP
gained 8 points, or 0.1%, to 13,731, after also briefly trading in the red.

The S&P 500 has declined six of the last seven sessions as stocks have seen a rocky start to August, but both the S&P 500 and Dow managed to shake off losses from earlier in the week as they fought to avoid a second straight weekly decline.

What’s driving markets

U.S. consumer prices rose by 0.2% in July on both a headline and core basis, with the latter excluding food and energy prices. Both measures were in line with economists’ expectations.

See: U.S. inflation rate creeps back up, CPI shows, but probably not enough to worry the Fed

On a year-over-year basis, headline prices rose by 3.2%, less than the 3.3% forecast by economists polled by The Wall Street Journal, but higher than the 3% reading from the prior month, and it was the first reacceleration in 13 months. Meanwhile, the increase in core inflation, excluding food and energy prices, over the past year slowed to 4.7% from 4.8%, the lowest rate in almost two years.

That had investors focused on whether or not the Federal Reserve is done hiking rates after bringing its policy rate to a 22 year high.

“The Fed is more likely to make one last rate hike this year to make sure inflation stays low than to hold rates where they are now, then probably pivot to cuts in early 2024,” said Bill Adams, chief economist for Comerica Bank, in emailed commentary.

Also see: 3 reasons why investors should be cautious about July’s ‘very encouraging’ CPI reading

Economists noted declines in both used and new car prices in July, while dismissing a 7.7% year-over-year increase in shelter prices, reasoning that slower growth in rents in July would help ameliorate price pressures in a sector that is being closely watched by the Fed. Based on how individual categories are weighted in the overall CPI data, the cost of rent and housing accounted for more than 90% of the increase in consumer prices last month.

“Overall, the underlying details of the July CPI inflation data are consistent with ongoing progress on disinflation,” said Gurpreet Gill, global fixed income macro strategist at Goldman Sachs Asset Management, in emailed commentary.

“Although core services inflation trended higher on the month, other component-level trend are evolving in line with our expectations. In particular, rents and used car prices softened, alongside clothing and airfares.”

Traders now see less than 14% chance of a September rate rise by the Fed after the CPI data but down from more than 20% a week ago, according to the CME’s FedWatch tool.

Still, a team at Citigroup Inc. worry rising energy prices could potentially cause inflation to reaccelerate later this year. West Texas Intermediate crude for September delivery
CLU23,
-1.86%
settled at $84.40 a barrel on the New York Mercantile Exchange on Wednesday, its highest level of 2023.

Read: Why ‘stunning’ jump in jet fuel, diesel prices may complicate Fed’s inflation fight in months ahead

In other economic news, the latest reading on unemployment claims showed the number of Americans applying for unemployment benefits increased last week by 21,000 to 248,000.

Treasury yields, which have been in focus for stocks lately, were little-changed on the day in recent trade as an initial knee-jerk decline after the release of the CPI data faded.

The yield on the 10-year Treasury note
BX:TMUBMUSD10Y
jumped to 4.07% after falling as low as 3.95% shortly after the inflation data were released at 8:30 a.m. Eastern Time.

The U.S. dollar also pushed higher in afternoon trade, with the ICE U.S. Dollar Index
DXY
up 0.1% at 102.55.