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US inflation remained contained in July, giving equity markets another reason to hold onto their recent gains as the S&P 500 consolidates near record highs.
Headline CPI increased by 0.1% month-on-month in July, following June's 0.4% decline, while annual inflation eased slightly from 3.5% to 3.4%. More importantly for the Federal Reserve, core CPI rose 0.2% month-on-month, with the annual rate slowing from 2.6% to 2.5%. Both readings were broadly in line with expectations.
The report therefore wasn't a major inflation surprise. Instead, it reinforced the idea that underlying price pressures are becoming more manageable.
That matters because the Fed is currently balancing two risks. Inflation remains above its longer-term objective, but recent weakness in the labour market has made further monetary tightening harder to justify. July's CPI numbers do little to strengthen the case for another rate hike and instead give policymakers room to wait for more information before the 15–16 September FOMC meeting.
Markets responded relatively calmly. US equities edged higher, Treasury yields declined and the dollar softened as investors reduced some expectations for additional tightening.
There is still one important inflation risk ahead: energy.
Oil prices have risen sharply amid continued tensions around the Strait of Hormuz, meaning July's CPI report is looking backwards at an inflation environment that may already be changing. Higher fuel and transport costs could push headline inflation higher again in August, making the next CPI release particularly important.
S&P 500 holds its breakout
The technical picture on the S&P 500 remains constructive.
After spending much of June and July consolidating beneath the 7,600 area, the index finally broke through that resistance at the beginning of August.
More importantly, price has also moved above the anchored VWAP from the previous highs, currently around the 7,737 region on the four-hour chart.
Rather than immediately reversing after the breakout, the S&P 500 is now consolidating above that level near 7,750.
That is important.
A breakout followed by consolidation above former resistance can indicate that buyers are accepting higher prices rather than simply chasing a short-lived spike.
The next question is whether the current consolidation develops into another leg higher.
As long as the index continues holding above the anchored VWAP and, more broadly, above the previous breakout region around 7,600, the bullish structure remains intact.
A decisive move out of the current consolidation would strengthen the case for continuation towards the upper end of the broader rising channel.
Conversely, a move back below the anchored VWAP would be the first warning that momentum is beginning to fade, while a deeper return below the 7,600 breakout area would raise the risk of a failed breakout.
For now, however, the macro and technical pictures are pointing in the same direction.
Inflation is cooling enough to reduce immediate pressure on the Fed, while the S&P 500 is consolidating above an important technical breakout.
The CPI report has not created a new bullish trend — but it may have removed another obstacle standing in the way of the one already underway.
