Stock market investors cheer July inflation data. Well-known companies like PIMCO are not so sure.

Wednesday’s release of the July CPI report contained enough downside surprises to give equity investors hope that the worst of inflation may be over. However, an underlying concern remained at big-name companies like PIMCO, where the focus has been on stickier parts of the data that may only get worse.

According to PIMCO economists Tiffany Wilding and Allison Boxer, the report’s details were “firmer” than the annual headline CPI rate implied – which fell from 9.1% in June to 8.5% for July and below economists’ expectations lag and traders of inflation derivatives. If food and energy prices continue to fall, June will likely prove to be the peak in annual inflation, Wilding and Boxer wrote in a note. But the core annual measure, which cuts out food and energy, “is likely to pick up speed again in August and isn’t expected to peak until September.”

The so-called core reading, which excludes volatile elements, is of concern to many in financial markets as it is intended to represent a true underlying value of inflation – although there has been some debate as to which timeframe of the core indicator is most relevant. The core was unchanged at 5.9% for the 12 months ended July and 0.3% mom versus 0.7% in June.

Wilding and Boxer note that the categories that triggered July’s core weakness — airfares and hotels — “are typically more volatile, while the more difficult components (rents/owner-equivalent rents) have remained stable.” In addition, the economists said other key inflation measures from the Cleveland Fed, New York Fed and Atlanta Fed “all accelerated” – with the depth and breadth of inflationary pressures spreading to all positions. Meanwhile, wage inflation has also spread from low-wage and low-skilled service positions to a range of industries, jobs and skill levels, they said.

“Today’s pressures have not changed our forecast for core inflation of 5.5% and 3.5% year-on-year for 2022 and 2023, respectively, nor our near-term outlook for the Fed,” economists at PIMCO said. They still see a relatively high chance of another 75 basis points in September.

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Bond giant PIMCO, which had $1.82 trillion under management in June, isn’t the only one to share its hesitancy over July’s CPI data, even as economists at BofA Securities and Jefferies called inflation peaks. Robert Frick, corporate economist at Navy Federal Credit Union, said, “We need a few more of these to peak and see any meaningful downtrend.” Meanwhile, Comerica Bank’s Bill Adams said the US will have a ” another energy price shock” looms if Europe is likely to suffer from an energy shortage.

Investors “were more than anxious to call a price summit,” and “the softer July headline is likely to perpetuate the notion that the worst of cost pressures are now a thing of the past,” said Lindsey Piegza and Lauren Henderson of Stifel Nicolaus & Co. But ” the market has been (over)reacting violently to a single data point for some time,” and it will take Fed policymakers several months of sharp falls before they are convinced that inflation is falling sustainably.

Following Wednesday’s CPI release, Fed funds futures traders lowered their expectations for a 75 basis point Fed rate hike in September to 37.5%, while increasing the likelihood of a smaller rate hike by 50 basis points to 62.5%, so the CME FedWatch tool.

All three major US indices DJIA, +1.46% SPX, +1.88% COMP, +2.50% were higher in afternoon trade, with the Dow Industrials gaining almost 500 points. Meanwhile, investors scrambled into bonds, sending most yields lower, led by falls in 2-year TMUBMUSD02Y rates by 3.127% and 3-year TMUBMUSD03Y rates by 3.086%, which underscored the Fed’s expected policy stance in reflect in the years to come. The 10-year benchmark yield TMUBMUSD10Y, 2.754% fell to 2.76%.

“The fall in core inflation is good news, but remember, we’ve been here before,” said Omair Sharif, founder and president of Inflation Insights.

After a surge in inflation in the second quarter of 2021, core inflation weakened sharply in the third quarter and then accelerated again in the fourth quarter, he wrote in a statement. In addition, a similar situation played out between January and June this year, he said. “We’ve had head fakes before, so this is no time for complacency,” Sharif said in a note.