Traders see Fed in ‘wait-and-see’ mode after CPI

Stocks, bonds and the dollar saw small moves, with a mixed inflation report reinforcing speculation the Federal Reserve will pause its rate hikes – but refrain from calling the end of its tightening cycle.

The S&P 500 was little changed. The Dow Jones Industrial Average underperformed. American Airlines led industry losses after cutting its earnings outlook amid a jump in jet fuel prices.

Most megacaps rose, with the chiefs of five of the 10 biggest U.S. companies appearing at a closed-door Senate meeting to shape how artificial intelligence is regulated. Apple fell as China flagged security problems with iPhones.

Two-year yields dropped below 5%. The greenback edged lower. Swaps tied to the next two Federal Open Market Committee meetings continued to price in little chance of a hike next week – and about 50% odds of one in November.

Measures of credit-default swaps for both investment and speculative-grade companies slid – suggesting bets on a September pause from the Fed supersede economic worries for now.

The core consumer price index, which excludes food and energy costs, advanced 0.3% from July, the first acceleration in six months.

From a year ago, it increased 4.3% – in line with estimates and marking the smallest advance in nearly two years. It’s still above the Fed’s 2% goal.

To Krishna Guha at Evercore ISI, while the report isn’t amazing as far as policy goes, it’s not a disaster either.

“Not a great CPI report, but not something that changes the basic Fed outlook,” said Guha, the firm’s vice chairman.

“This Fed is not itching to hike again and we think it would take significantly more to push the FOMC to actually deliver another increase – with our base case remaining the Fed is done here.”