US futures rise after lower than forecast inflation data

US stock futures and government bonds rallied sharply on Wednesday after inflation data for the world’s largest economy came in lower than forecast.

The consumer price index data published on Wednesday showed that prices in the US rose 8.5 per cent on a year-to-year basis in July, below the 8.7 per cent rise expected by economists. Prices were flat on a month-on-month basis, below the 0.2 per cent increase anticipated.

Futures tracking the blue-chip S&P 500 gained 1.7 per cent following the release, while those tracking the technology-heavy Nasdaq 100 gained 2.5 per cent.

In US government bond markets, the yield on the 10-year US Treasury bond, which moves with inflation and growth expectations, dropped 0.1 per cent to 2.7 per cent. The yield on the two-year note, which moves with interest rate expectations, shed 0.2 per cent to 3.1 per cent.

In Europe, the Stoxx 600 gained 0.9 per cent and Germany’s Dax index gained 1 per cent after losses in the previous session.

The release was “the only significant economic data of the week”, Adam Cole, chief currency strategist at RBC Capital Markets, wrote in a note on Wednesday morning.

The stronger than expected data will relieve concerns among investors that the Federal Reserve will raise rates by 0.75 percentage points at its next policy meeting in September.

The inflation benchmark hit 9.1 per cent in June, the highest level in 40 years, which pushed the US central bank into making back-to-back interest rate increases of 0.75 percentage points.

Market participants have been divided over whether the Fed will raise interest rates in September by 0.5 or 0.75 percentage points.

Core inflation, a measure of price growth that strips out volatile categories including energy and food, also came in below expectations, staying at the 5.9 per cent level it hit in June and well below a peak in March of 6.5 per cent.

This came after the broader Nasdaq Composite fell 1.2 per cent on Tuesday, as a warning from chipmaker Micron Technology on slowing consumer demand sparked fears for the outlook of the sector and economic growth. The S&P 500 fell 0.4 per cent, marking its fourth consecutive daily decline.

However, the S&P 500 has climbed 12 per cent since mid-June, leading to optimism from some investors.

“People are ignoring good news,” said Patrick Spencer, vice-chair of equities at Baird. “I think this might be a new bull market as opposed to a bear market rally. The Fed will pivot eventually, the rate of increases will have to slow . . . if inflation comes in below expectations, the market will rally sharply.”

Oil prices edged lower on Wednesday, with international benchmark Brent crude shedding 1.8 per cent to trade at $94.56 a barrel and US marker West Texas Intermediate down 1.8 per cent at $88.9.

Earlier on Wednesday, indices in Asia were dragged down by declines in tech stocks, with Hong Kong’s Hang Seng index falling 2.5 per cent. China’s CSI 300 benchmark of Shanghai- and Shenzhen-listed stocks fell 1.2 per cent. Japan’s Topix closed down 0.2 per cent.