US Inflation Eases to 3.4 Percent as Tech Stocks Lead Market Gains

The U.S. consumer price index (CPI) rose 3.4% year-over-year in July, a deceleration from the 3.5% pace recorded in June, matching economists’ expectations [1]. The data reinforced market sentiment that the Federal Reserve may hold interest rates steady at its September meeting, as investors weigh cooling inflation against a backdrop of subdued wage growth [1].

Inflation and the Fed outlook

The "core" CPI, which strips out volatile food and energy costs, rose 2.5% in July, down from 2.6% in June and reaching its lowest level since February [1]. This in-line reading helped stabilize markets, with the Nasdaq Composite and S&P 500 closing up 0.5% and 0.3%, respectively, while the Dow Jones Industrial Average finished fractionally lower [1]. Following the release, the CME Group’s FedWatch tool indicated a 40% probability that the Federal Reserve will keep interest rates steady next month, a decline from the 48% likelihood seen the previous day [1].

The economic picture is further complicated by wage data; average hourly earnings rose at an annual pace of 3.2% in July, trailing the 3.4% inflation rate [1]. Economists note that this muted wage growth may limit consumer spending power, though it simultaneously provides the Federal Reserve with less incentive to hike rates, potentially easing pressure on borrowing costs [1]. Meanwhile, the 10-year Treasury yield settled at 4.69% at 4 p.m. ET, up from 4.65% immediately following the report but down one basis point from the previous day's close [1].

Tech earnings and retail shifts

Technology firms drove the day's gains, with CoreWeave and Super Micro Computer both surging 19% following strong quarterly results [1]. The broader iShares Semiconductor ETF rose more than 2%, though gains were uneven across the sector; while Nvidia shares rose 3%, other "Magnificent Seven" tech giants finished in the red [1].

In the retail sector, Gap shares fell 4% after Jefferies analysts downgraded the stock to "hold" from "buy," citing concerns over weakening trends at the company's Old Navy brand [1]. Conversely, Wendy’s shares jumped 11% following reports that Trian Fund Management is preparing a bid to take the fast-food chain private [1]. In Canada, investment fund data showed a divergence in asset flows: mutual fund assets fell 0.5% to $2.769 trillion in July, while ETF assets rose 1.5% to $896.6 billion, driven by robust inflows into bond funds [2].

What to watch

• September FOMC Meeting: Investors are monitoring whether upcoming inflation data will alter the current consensus that the Federal Reserve will leave rates unchanged next month [1].
• Retail Earnings: Gap is scheduled to report second-quarter earnings on Aug. 27, which will provide further insight into the performance of its various brands [1].
• Energy Markets: Despite escalating conflict in the Middle East, including recent attacks in the Red Sea and the Gulf of Oman, crude oil futures remained lower, with WTI at $83 a barrel [1].

The market’s reaction suggests a growing comfort with the current inflation trajectory, provided that wage growth remains contained. Whether this "no need to hike" narrative holds will depend heavily on the next round of inflation prints before the central bank convenes in September [1].