Softer inflation gave markets some breathing room early Wednesday. But by the end of the session, Treasury yields were higher, the dollar had strengthened against most major currencies, and the stock market’s gains were concentrated in the Nasdaq indices.
The economic picture was mixed. August PCE inflation came in below expectations, second-quarter growth was revised higher, and a larger goods trade deficit contributed to a sharp downgrade in the Atlanta Fed’s third-quarter growth estimate. For traders, the message was that the Fed has room to wait, but inflation and growth risks have not disappeared.
Dollar gains against most major currencies
The dollar finished the supplied late-session snapshot higher against six of the seven major currencies. Its biggest gain came against the Australian dollar. Sterling was the exception, rising 0.26% against the greenback.
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EURUSD: 1.1329, −0.10%.
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USDJPY: 157.39, +0.07%.
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GBPUSD: 1.3263, +0.26%.
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USDCHF: 0.8353, +0.19%.
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USDCAD: 1.4232, +0.31%.
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AUDUSD: 0.6943, −0.57%.
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NZDUSD: 0.5631, −0.14%.
The dollar’s recovery shows that the initial reaction to softer inflation did not define the entire session. Higher Treasury yields provided a supportive backdrop later in the day.
Treasury yields reverse the early decline
Yields initially moved lower after the inflation report, but the supplied end-of-day snapshot showed increases across the four key maturities:
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2-year: 4.8953%, +0.63 basis point.
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5-year: 5.0913%, +2.83 basis points.
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10-year: 5.2912%, +3.62 basis points.
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30-year: 5.6309%, +3.69 basis points.
Longer-term yields rose more than the two-year yield, steepening the curve. That matters because longer-term borrowing costs can remain elevated even when traders become less certain about an immediate Fed hike.
Softer PCE helped the Fed’s near-term outlook. It did not deliver lasting relief from higher market interest rates.
U.S. stocks close mixed
The Nasdaq indices held modest gains, while the Dow, S&P 500 and Russell 2000 finished lower:
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Dow industrial average: 50,914.09, −441.03 points or −0.86%.
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S&P 500: 7,652.03, −18.82 points or −0.25%.
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Nasdaq Composite: 26,861.06, +63.52 points or +0.24%.
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Russell 2000: 2,796.88, −11.04 points or −0.39%.
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Nasdaq 100: 30,408.50, +69.17 points or +0.23%.
The Dow closed at its lowest level since early June, with only eight of its 30 components advancing.
September’s performance highlighted the same divide:
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Dow: −4.29%.
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S&P 500: −0.45%.
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Nasdaq Composite: +1.86%.
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Nasdaq 100: +3.23%.
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Russell 2000: −5.39%.
Technology held up considerably better than industrials and smaller companies. That is an uneven market beneath the headline index changes.
Mega-cap technology provides support
Six of the Magnificent Seven advanced. Apple gained 1.10%, Amazon rose 1.01%, Alphabet added 0.93%, Microsoft gained 0.77%, Tesla rose 0.56%, and Nvidia advanced 0.51%.
Meta was the exception, falling 1.84%.
Those gains helped support the Nasdaq indices, but the Dow’s decline and weak breadth showed that buying did not extend across the market. The results were consistent with the continued preference for large technology companies over industrial and smaller-company exposure.
European shares finish lower
Overseas in Europe, all the major markets declined with France, Italy and Germany leading the losers:
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Germany’s DAX: 25,199.20, −200.02 points or −0.79%.
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France’s CAC 40: 7,964.52, −71.36 points or −0.89%.
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UK’s FTSE 100: 10,606.01, −30.69 points or −0.29%.
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Spain’s IBEX 35: 19,426.20, −91.30 points or −0.47%.
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Italy’s FTSE MIB: 51,371.97, −432.98 points or −0.84%.
U.S. data: Softer inflation, firm demand and a trade headwind
August core PCE rose 0.2% month-on-month versus 0.3% expected, with annual inflation at 3.0% versus 3.3% expected. Headline inflation rose 0.3% for the month and 3.4% from a year earlier versus 3.7% expected.
Spending remained firm, rising 0.9% versus 0.8% expected, while personal income increased 0.2% versus 0.4% expected.
The inflation surprise was welcome, but revisions helped lower the readings. Changes in the BEA’s measurement of several price components reduced July’s annual core inflation rate by 0.36 percentage point. August’s report also does not capture September’s diesel-price surge.
Second-quarter GDP was revised to 2.2% annualized growth from 1.5%. Consumer spending increased 3.8%, while real final sales to private domestic purchasers rose 4.6%. Those details point to resilient domestic demand, even as quarterly inflation measures were revised lower.
The forward-looking growth picture was less encouraging. August’s goods trade deficit widened to $132.6 billion versus $115.0 billion expected. Wholesale inventories rose 0.7%, while retail inventories excluding autos increased 0.1%.
The Atlanta Fed cut its GDPNow estimate for third-quarter growth to 3.7% from 5.0%. A larger projected drag from net exports and slower estimated consumer spending outweighed stronger investment. Growth remains positive, but the downgrade takes some heat out of the outlook.
Fed outlook shifts toward December
Goldman Sachs moved its forecast for the next Fed hike from October to December.
That followed comments from John Williams, the New York Fed president, suggesting one more hike this year may be sufficient if the economy develops as expected, with no urgency to act immediately after September’s increase. The distinction is timing: a longer pause still leaves another hike on the table. The US treasury run higher has done the Fed tightening with the 10 year up close to 70 bps since August 25th.
Oil rises as Hormuz remains in focus
WTI crude futures were at $90.30, up $0.92, in the supplied late-session snapshot.
In afternoon comments, President Trump said the U.S. had almost total control of the Strait of Hormuz and described strong oil flows over the preceding three days. He also signaled developments on Iran soon, without outlining a specific agreement.
For oil traders, the question is whether those flows can continue reliably. The comments offered reassurance, but sustained shipments and concrete diplomatic progress remain the developments that matter. The price action suggests some apprehension toward victory and end to the conflict.
Gold and silver decline
Spot gold was at $4,158.47, down $23.52 or 0.56%, while silver traded at $60.413, down $1.0422 or 1.70%.
The declines were consistent with the stronger dollar and higher Treasury yields. Higher yields increase the attraction of interest-bearing assets, while a stronger dollar makes dollar-priced metals more expensive for buyers using other currencies.
Silver suffered the larger percentage decline. Its industrial exposure also makes it sensitive to the growth outlook.
Bitcoin slips
Bitcoin was at $83,624, down $5, leaving it essentially unchanged on the day.
It did not retain the earlier upside momentum, but its small net change offers limited evidence of a broader shift in its relationship with equities, the dollar or yields.
What carries forward?
The softer inflation report gives the Fed room to be patient. But yields finished higher, the dollar remained firm, and stock-market strength was narrow.
Into October, traders will watch whether inflation relief can translate into sustained bond-market relief, whether equity gains broaden beyond technology, and whether developments around Hormuz deliver reliable oil flows.
This article was written by Greg Michalowski at investinglive.com.