Inflation cools

June CPI and PPI both came in softer than expected, and that quickly pulled down near-term rate-hike fears. The market took it as a green light for risk assets, though the drop in energy prices that helped cool inflation also leaves the whole story vulnerable to a rebound in oil.

This is mostly a rates story. Softer inflation tells investors the Fed has less reason to stay aggressive, so anything tied to future growth or deal activity gets a lift. That helps financial firms that live on trading, underwriting, and M&A, and it also tends to support technology names valued on profits farther out.

The catch is that the biggest cooling force was lower energy prices, so the same force helping markets today is hurting oil producers and service companies. If oil stays soft, energy stays under pressure; if geopolitical tension pushes oil back up, the inflation and rate story can flip quickly. The next tells are whether inflation keeps cooling without another leg down in energy, and whether dealmaking and IPO activity keep broadening instead of just popping for a day.

Cooling inflation takes pressure off interest-rate fears, which is helpful for a lot of financial firms at once. Better rate expectations usually mean more dealmaking, more stock and bond trading, and a friendlier mood for raising money and selling businesses. Some plain-vanilla lenders can still feel margin pressure, so the boost is real but not uniform.

Morgan Stanley benefits from stronger risk appetite and more underwriting, trading, and deal activity in its markets businesses.