The July Consumer Price Inflation report made another step toward the Federal Reserve’s 2% target, though less pronounced than June’s, sustaining optimism for imminent interest rate cuts.

Last month, a basket of goods and services purchased by U.S. consumers rose by 2.9% year-over-year, slightly below the previous and expected 3%, marking the fourth consecutive decline in annual inflation and the lowest rate since March 2021.

The annual core inflation rate also eased as anticipated, from 3.3% to 3.2%, the lowest since April 2021.

However, the July report was marred by an increase in the shelter component, which, due to its significant weight in the basket, accounted for about 90% of the headline inflation rise.

The decline in annual inflation rates wasn’t sufficient to bolster expectations for a 50-basis-point rate cut in September.

Market-implied probabilities for such a substantial cut dropped from 50% to 43% following the report, while the likelihood of a smaller 25-basis-point cut increased to 57%.

Market Reactions: Stocks Rise, Yields Steady, But Dollar Strengthens Against Yen

The July inflation data sparked a positive reaction in stocks, especially in the tech sector, with small caps outperforming their larger-cap counterparts. Treasury yields remained largely stable, while the U.S. dollar gained ground against the low-yielding Japanese yen.

Here are the premarket price reactions of the following exchange-traded funds (ETFs) to the inflation data:

• The SPDR S&P 500 ETF Trust (NYSE:SPY) was up 0.2% at 09:10 a.m. in New York. Major premarket gainers were Kellanova (NYSE:K) and Cardinal Health Inc. (NYSE:CAH), up 7.2% and 5.5% respectively.
• The tech-heavy Invesco QQQ Trust (NASDAQ:QQQ) rose 0.3%. Top gainers were Arm Holdings plc (NASDAQ:ARM) and Micron Technology Inc. (NASDAQ:MU) up 3.1% and 3%, respectively.
• Semiconductors were the strongest-performing industry, with the VanEck Semiconductor ETF (NYSE:SMH) up 0.9%. Micron Technology Inc. and ASML Holding N.V. (NASDAQ:ASML) led gains, with the latter up 2.1%.
• The iShares Russell 2000 ETF (NYSE:IWM) rallied 0.5%, with Victoria’s Secret & Co. (NYSE:VSCO) and AnaptysBio, Inc. (NASDAQ:ANAB) making the larger gains in the premarket, up 16% and 13%, respectively.
• The Invesco CurrencyShares Japanese Yen Trust (NYSE:FXY) fell 0.2%.

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Image created using artificial intelligence via Midjourney.