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 Group Inc. 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 Inc. fell as China flagged security problems with iPhones.

Two-year yields dropped below 5 per cent. 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 per cent 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 per cent from July, the first acceleration in six months. From a year ago, it increased 4.3 per cent — in line with estimates and marking the smallest advance in nearly two years. It’s still above the Fed’s 2 per cent 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.”

More Comments on CPI:

• Chris Zaccarelli, chief investment officer at Independent Advisor Alliance:
  • “This isn’t the goldilocks number that investors were hoping for, but markets can still trade in a range – as inflation is high enough to keep the Fed still in play — but not hot enough for a shift away from the ‘Fed is almost done’ narrative.”
  • “As long as the economy remains resilient and inflation doesn’t reignite, the market can rally into year-end, once we get past the seasonally weak months of September and October.”
• Mike Loewengart at Morgan Stanley Global Investment Office:
  • “Today’s middle-of-the-road CPI report may have disappointed those who were looking for inflation to establish a clear cooling trend. But given how high oil prices are and how strong recent economic data has been, the fact that the numbers were more or less in line with estimates may be seen as a small victory. There will continue to be bumps in this road, but the Fed is still on track to leave interest rates unchanged after next week’s policy meeting.”
• Damian McIntyre, portfolio manager for alternative equities at Federated Hermes:
  • “Today’s U.S. CPI report wasn’t earth-shattering. This print likely makes a case for another pause for the FOMC in September, but provides little clarity into Fed action beyond this. We expect conflicting pronouncements from the Fed heading into the autumn and consensus over the best path forward is unlikely, creating the potential for a contentious November meeting.”
• John Leiper, chief investment officer at Titan Asset Management:
  • “It’s tempting to read too much into the month-on-month data in this hyper data-dependent central bank age. I think this doesn’t move the needle too much. We still expect the Fed to hold on rates at the next meeting. Markets are pricing in slightly higher chance of another hike later this year.”
• Greg Wilensky, head of U.S. fixed income at Janus Henderson Investors:
  • “While these numbers do not change our, and the market’s expectations that the Fed will hold the target Fed Funds rate unchanged at the September meeting, the slightly stronger number can influence the tone of the press conference and Summary of Economic Projections.” 
  • “We continue to expect some reduction in the number of participants projecting further hikes, but probably not enough to move the median projection of one more rate hike. That said, we believe that we have likely seen the last rate hike for this cycle, as the economic data that the Fed will see over the coming months will keep them on hold and allow the impact of 5.25 per cent of prior hikes to slow the economy and inflation.”
• Florian Ielpo at Lombard Odier Asset Management:
  • “This inflation report places the Fed in a more comfortable wait-and-see situation: the marginally higher than expected inflation comes from the evolution of energy prices – nothing the Fed should be worrying too much about at the moment.”
• Brian Pietrangelo at Key Private Bank:
  • “In our view, the economy maintains decent momentum, but is showing signs of slowing, and thus the Federal Reserve is likely to pause next week and wait for additional data to unfold for the November meeting.”
• Hussain Mehdi, macro and investment strategist at HSBC Asset Management:
  • “The upside surprise to the August core monthly print will be a disappointment for Fed policymakers. However, the broad trend of disinflation remains intact while there is ongoing evidence of a cooling labor market. This means there is still a strong case for a pause at next week’s Fed meeting.”
  • “In our view, we believe there is room for further gains for U.S. equities this year. But we think the economic reality of restrictive monetary policy will eventually catch up with the market. A likely tip into recession next year will damage the outlook for corporate earnings and can weigh on multiples. For this reason, we think a cautious and defensive positioning in portfolios still makes sense.”
• Seema Shah, chief global strategist at Principal Asset Management:
  • “The inflation print likely is not enough to tilt next week’s Fed call towards a hike, yet it also hasn’t entirely cleared up the question of a November pause versus hike.”

Corporate News

• Moderna Inc. gained after saying a reformulated version of its messenger-RNA based flu shot met its primary goals in a final-stage trial — a result that could pave the way for the company to seek regulatory approval for the influenza vaccine.
• Ford Motor Co. advanced after UBS Group AG upgraded its rating to buy from sell.
• 3M Co. slipped after pushing out the spinoff of its health care division and cautioning on the outlook for next year.
• Spirit Airlines Inc. slipped after citing “steep” discounts for travel ahead of the Thanksgiving holiday, and also saying the surge in fuel — one of the industry’s largest costs — would hurt its quarterly results.
• Shares of commercial real estate brokerages like CBRE Group Inc. and Jones Lang LaSalle Inc. slumped on speculation interest rates will remain higher for longer, which could add more pressure to transactions.
• Caesars Entertainment Inc. paid tens of millions of dollars to hackers who broke into the company’s systems in recent weeks and threatened to release the company’s data, according to two people familiar with the matter. The shares fell.

Key events this week:

• Japan industrial production, Thursday
• European Central Bank policy meeting and news conference by President Christine Lagarde, Thursday
• U.S. retail sales, PPI, business inventories, initial jobless claims, Thursday
• China property prices, retail sales, industrial production, Friday
• U.S. industrial production, University of Michigan consumer sentiment, Empire Manufacturing index, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.1 per cent as of 4 p.m. New York time
• The Nasdaq 100 rose 0.4 per cent
• The Dow Jones Industrial Average fell 0.2 per cent
• The MSCI World index was little changed

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro fell 0.2 per cent to US$1.0732
• The British pound was little changed at US$1.2488
• The Japanese yen fell 0.3 per cent to 147.46 per dollar

Cryptocurrencies

• Bitcoin rose 0.3 per cent to US$26,150
• Ether was little changed at US$1,599.68

Bonds

• The yield on 10-year Treasuries declined three basis points to 4.25 per cent
• Germany’s 10-year yield was little changed at 2.65 per cent
• Britain’s 10-year yield declined seven basis points to 4.35 per cent

Commodities

• West Texas Intermediate crude was little changed
• Gold futures fell 0.2 per cent to US$1,931.20 an ounce