Seeded by a withering recoil in AI and EV giants Nvidia and Tesla, the Nasdaq turned tail from record highs and plunged almost 2% after the CPI report, even as small caps in the Russell 2000 surged more than 3% to three-month highs on their best day of the year so far.
Less extreme but also dragged down by the heavyweights, the S&P 500 lost almost 1%, though futures have held the line overnight.
At least Tesla, which tumbled 8.4% for its biggest drop since January, had some excuse after a Bloomberg report claimed the firm is delaying the launch of robotaxi by about two months.
But the wild rotation of stock sectors seemed more like a spontaneous reaction to the positive inflation news, where headline prices actually fell during the month for the first time in four years and annual inflation dipped below 3% for the first time in 12 months.
The runes of the report were similarly impressive, with core inflation below forecast at 3.3% – its lowest in three years – and irksome services and shelter components also moderating.
A big drop in weekly jobless claims in the background provided a pleasing mix, despite the confusing stock market volatility. And producer price updates on Friday will hold the picture up to the light again.
Federal Reserve officials were quick to applaud the piece.
St Louis Fed President Alberto Musalem called the June report “encouraging”, San Francisco Fed boss Mary Daly talked of “relief” and the Chicago Fed’s Austan Goolsbee called it “excellent” news that puts inflation back on track to its 2% target.
The International Monetary Fund said it continues to believe the Fed can start cutting interest rates later this year.
Rate futures agreed, with a first Fed cut now fully priced for September and as much as 60 basis points seen over the remainder of the year. Ten-year Treasury yields plunged to their lowest in four months, though they popped back above 4.2% early on Friday.
The dollar, predictably, was a casualty.
And there was almost consternation in the dollar/yen pair, which plunged almost 2% amid some suspicion and various reports the Japanese authorities used the opportunity to intervene to buy yen and maximise the move.
No official confirmation was forthcoming overnight, with the dollar regaining a foothold back above 159 yen, still almost three yen below the recent 38-year high.
