Inflation Dropped More Than Expected In The U.S. In June. Stocks Climbed As a Result

Stocks rose on Tuesday after inflation dropped in the U.S. and traders reduced their expectations of a rate hike by the Federal Reserve in its next meeting.

The S&P 500 climbed 0.38%, while the tech-heavy Nasdaq Composite overperformed, gaining 0.90%. The Dow Jones Industrial Average edged higher, increasing by 0.02%.

Markets were largely buoyed by the inflation figure. Concretely, consumer prices rose 3.5%, compared to analysts' expectations of 3.8%. CNBC noted that prices saw their biggest decline in more than six years as energy prices dropped.

The seasonably-adjusted consumer price index fell 0.4%, when analysts expected it to be 0.2%. Core inflation, which excludes more volatile components including energy, was flat on the month, the rate standing at 2.6%. Analysts expected it to rise 0.2% and for the rate to stand at 2.9%.

The softer-than-expected inflation report immediately reshaped market expectations for the Federal Reserve's next policy meeting. According to CME Group's FedWatch, traders now assign only about a 10% probability that the central bank will raise its benchmark interest rate at its July 28-29 meeting. Before the inflation report was released, markets had priced in roughly a 35% chance of another quarter-point increase.

Expectations for September also eased considerably. Investors now see approximately a 60% chance of a rate hike at the Fed's Sept. 15-16 meeting, down from more than 90% before Tuesday's data.

However, renewed clashes between the U.S. and Iran are raising concerns about the trend's sustainability. Oil prices whipsawed on Tuesday, decreasing as President Donald Trump gave up a plan to charge for passage through the Strait of Hormuz, but climbing again as hostilities escalated.

"Based on highly productive conversations with Middle East leadership, I have decided to replace the 20% United States Reimbursement Fee with Trade and Investment Deals that the various Gulf States will be making into the United States," Trump said in a social media post.

He went on to say the investments "will be MASSIVE but, at the same time, extraordinarily good for them, and their future."

They rose again, with Brent crude, the international benchmark, going back above $85 a barrel in the afternoon as the U.S. military launched new strikes against Iran ahead of the blockade of the country's ports. West Texas Intermediate, the U.S. benchmark, stood just below $80 a barrel at the same time.