Dow surges as inflation finally cools off

Despite back-to-back quarters of negative GDP, Randall Kroszner, former governor at the Federal Reserve, said he does not believe the US economy is currently in recession nor that the economists at the National Bureau of Economic Research will declare one.

“It’s highly unlikely they would say the US is in recession now given the strength of the jobs market,” he said, adding that the poor GDP reports were largely driven by inventory drawdowns.

Still, Kroszner warns there is a “heightened risk” of recession over the next year or two because the Fed is raising interest rates and fiscal stimulus is unlikely.

“It is possible for the Fed to have a soft-ish landing,” he said. “But that relies on no big negative shocks and everything going right.”

Even though inflation cooled off considerably in July, the cost of living remains uncomfortably high and may not get back to normal levels anytime soon.

Randall Kroszner, former governor at the Federal Reserve, told CNN that while inflation has likely peaked, it will take at least a year before inflation returns to the 2% level targeted by the Fed.

“It’s going to take quite some time,” Kroszner said in a phone interview, referring to how long it will take before the Fed’s preferred inflation metric, the personal consumption expenditures (PCE) price index, gets back to 2%.

“Core inflation is still very disturbing for the Fed, dramatically above where the Fed wants it to be,” said Kroszner, now a professor at the University of Chicago Booth School of Business. “It’s too early to give the victory signal because you really have to see core inflation come down. This is one report.”

Investors cheered the news that inflation cooled off a bit in July. But not all traders were happy. Oil stocks, which have been big market winners in 2022 as crude prices soared following Russia's invasion of Ukraine, were notable market losers Wednesday.

Chevron (CVX) was flat, one of just a few notable laggards in the Dow. Merck (MRK) was the only other Dow stock trading lower. (Drug stocks typically hold up better as a defensive hedge against inflation and economic slowdown worries.)

Oil stocks were among the few losers in the S&P 500, too. Schlumberger (SLB), Halliburton (HAL) and Coterra Energy (CTRA) were all in the red Wednesday morning.

Conversely, cruise line stocks led the market on Wednesday. Norwegian (NCLH), Royal Caribbean (RCL) and Carnival (CCL) all rose more than 10%. The three stocks are still down sharply this year, but investors are apparently betting that the worst may be over.

Lower energy costs should boost profits, and consumers may also look to travel more if inflation fears ebb. To that end, casino owner Caesars (CZR) also soared.

US stocks rose after Wednesday's inflation report eased investors' expectations on how quickly the Fed will raise interest rates.

The Dow was up 550 points, or 1.6% mid-morning Wednesday. 

The S&P 500 rose 1.9%. 

The Nasdaq Composite gained 2.5%. 

The headline CPI for July rose 8.5% year-over-year and remained flat from June. Economists had expected prices to increase 8.7% annually and 0.2% between June and July.

Recession worries are swirling in the metaverse, too.

Gaming platform Roblox (RBLX) reported a bigger-than-expected loss for the second quarter, news that sent its stock tumbling 9% in the real world Wednesday morning.

Investors are worried about the fact that bookings, a key measure of future revenue, fell 4% in the quarter.

What's more, the company's average bookings per daily active user (ABPDAU) number, which looks at how much money people are spending to buy virtual goods, plunged 21%. In other words, people are keeping a closer watch on how they spend their Robux due to inflation concerns.

Roblox isn't the only video game company that's getting hit by growing fears of a weakening economy. Grand Theft Auto maker Take-Two Interactive (TTWO), which recently bought mobile gaming company Zynga, also disappointed Wall Street with its latest results, The stock fell 4% Tuesday on the news.

Take-Two CEO Strauss Zelnick warned on a conference call with analysts that gamers are becoming more cautious.

"I don't believe the entertainment business is recession proof or even necessarily recession resistant," Zelnick said, adding that "when you have 50% of big bank economists saying we think we might be in a recession in the next quarter or two, my attitude is the market believes we're in a recession right now, and as a consumer-facing company, we are seeing some softness."

Good news is good news, so let's celebrate for a moment the fact that prices didn't rise overall last month for the first time since November 2020.

OK, moment over.

Here's the bad news: Prices didn't rise for one reason, and one reason only: Falling energy costs. Gas has been down in the United States each day for nearly two straight months. Oil has come down below $90 a barrel after surging above $130 a barrel just a couple months ago.

Falling energy prices are certainly welcome, but we all know how volatile those prices can be. The ongoing war in Ukraine has made prices particularly sensitive to disruptions. And hurricane season's peak is right around the corner.

Energy prices fell 4.6% in July overall. Gas fell 7.7%, fuel oil tumbled 11%, natural gas prices were down 3.6% and transportation costs were 0.5% lower.

Stripping out energy, prices rose in practically every other category except for apparel (basically flat: -0.1%) and used cars (-0.4%).

Meanwhile, food prices rose another 1.1%. Between July 2021 and July 2022, food prices surged 10.9% -- the largest annual increase since the May 1979. 

Electricity costs were 1.6% higher, which is no fun when you're trying to stay cool in an unending heat wave.

So let's cheer the fact that prices didn't rise overall. But July's report indicates that the Fed may not be having the desired effect on inflation, despite historic rate hikes. It seems high energy prices may have brought themselves down as demand began to evaporate.

The stock market sure liked Wednesday's inflation report, which showed price hikes took a break in July.

Dow futures surged 400 points, or 1.3%.

S&P 500 futures were 1.6% higher.

Nasdaq futures rose 2.3%.

The inflation report suggests Americans are finally getting some relief after 19 straight months of rising prices. It may also mean that the Fed can ease up on the gas just a bit instead of continuing its historic pace of rate hikes.

But for the Fed's next meeting, scheduled for September, the market still anticipates another three-quarter-point rate hike to keep prices from rising, according to CME's FedWatch Tool.

Runaway inflation took a breather in July, with consumer prices increasing by 8.5% year over year, a slower pace than the 9.1% increase in June, the Bureau of Labor Statistics reported Wednesday.

On a month-to-month basis, prices held steady, compared to the 1.3% increase in June.

Core inflation, which does not include volatile food and fuel components, was unchanged on a year-over-year basis after last month's 5.9% jump.

Months' worth of elevated numbers for the Consumer Price Index, which covers a wide array of goods and services Americans buy, pose a growing challenge for the Federal Reserve, which has committed to reining in soaring prices while trying to avoid plunging the economy into a recession.

So much for the bitcoin bounce? Coinbase (COIN) shares were set to tumble about 5% Wednesday morning after the crypto brokerage firm reported a whopping $1.1 billion loss, worse than expected.

Revenue plunged more than 60% from a year ago and more than 30% from the first quarter of 2022. The "crypto winter" that Coinbase CEO Brian Armstrong talked about earlier this year is clearly continuing.

"The current downturn came fast and furious, and we are seeing customer behavior mirror that of past down markets," the company said late Tuesday in its earnings letter to shareholders.

Vin Diesel may not be able to save Coinbase. But investors are hoping BlackRock (BLK) might.

Shares of Coinbase, despite a more than 10% drop Tuesday before second quarter results were released, are up more than 35% in the past week. That rally is largely due to news that Coinbase is partnering with BlackRock to let the iShares owner's institutional clients trade bitcoin on Coinbase Prime.

Coinbase's stock is still down more than 65% this year though.