U.S. stock futures held steady early Wednesday, one day after a surprisingly soft inflation report lifted Wall Street and cooled fears that the Federal Reserve might raise interest rates again this year.

Futures on the S&P 500 edged up about 0.1% before the bell, while Nasdaq 100 futures gained roughly 0.6% as tech shares extended their rally. Dow futures slipped about 0.1%, weighed down by energy names as oil prices stayed elevated on tensions around the Strait of Hormuz.

The move follows Tuesday’s session, when the S&P 500 rose 0.38% to close at 7,543.59 and the Nasdaq Composite climbed 0.9% to 26,107.01. Both indexes rallied after the U.S. Bureau of Labor Statistics reported that consumer prices unexpectedly fell in June.

Why the CPI report moved markets

The Consumer Price Index dropped 0.4% in June from May, the largest one-month decline since April 2020, according to the BLS. Over the past 12 months, headline inflation slowed to 3.5%, down from 4.2% in May and below the 3.8% economists had expected.

The details were even friendlier for stocks. Core CPI, which strips out food and energy, was unchanged on the month and rose just 2.6% over the year, its smallest annual gain in months. A 5.7% plunge in energy prices — led by a 9.7% drop in gasoline — did most of the work, but shelter costs also rose just 0.1%, their smallest monthly increase since January 2021.

Softer inflation matters because it reshapes the rate debate. Under new Chair Kevin Warsh, the Fed has struck a hawkish tone, and some traders had even begun pricing in the risk of another rate hike rather than a cut. A cooler print takes some of that pressure off. A weak jobs report earlier this month had already complicated the case for tighter policy under Warsh’s Fed.

Bond markets agreed. The yield on the 10-year Treasury note fell about 6 basis points to 4.55%, while the more policy-sensitive 2-year yield dropped to around 4.18%, a sign that investors trimmed their bets on higher rates.

Warsh takes the hot seat again

The main event Wednesday is political as much as economic. Warsh, sworn in as the Fed’s 17th chair in May, appears before the Senate Banking Committee at 10:00 a.m. ET for the second day of his semiannual monetary policy testimony. On Tuesday, he told the House that the central bank has “no tolerance for persistently elevated inflation” and cautioned that the latest improvement was not “mission accomplished.”

Investors will listen for whether the soft CPI print softens his stance at all, or whether he doubles down on the fight to return inflation to the Fed’s 2% target. Any hint on the timing of the next policy move could swing rate-sensitive sectors — from banks to homebuilders to high-multiple tech names, whose valuations lean heavily on low rates. Investors uneasy about stretched megacap tech can weigh S&P 500 funds that skip the “Magnificent Seven”.

What to watch for the open

  • Producer prices: the June PPI wholesale-inflation reading is on the docket and could confirm or complicate the CPI story.
  • Bank earnings: results from JPMorgan and other big lenders will test whether Warsh-era rates are helping or hurting margins.
  • Warsh, 10 a.m. ET: watch for any shift in tone on rate cuts versus hikes.
  • Oil and the dollar: Strait of Hormuz headlines are keeping energy prices — and Dow futures — on edge.

With valuations near records, the reaction may hinge less on the data and more on the Fed chair’s words. For investors trying to judge whether stocks are cheap or stretched, the price-to-earnings ratio remains the simplest place to start. The soft CPI bought the bulls some room. Warsh could just as easily take it back.