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  • Writer's pictureThe San Juan Daily Star

U.S. stocks rally as inflation data cements bets on rate hike pause

The S&P 500 and Nasdaq climbed to 14-month highs on Tuesday after data showed consumer prices rose modestly in May, boosting bets that the Federal Reserve will not raise interest rates at the end of its policy meeting on Wednesday.

Stocks rose after a U.S. Labor Department report showed the consumer price index (CPI) rose 0.1% last month after a 0.4% jump in April, with core inflation unchanged at 0.4%.

On a year-on-year basis, headline inflation increased by a less-than-estimated 4.0%, reflecting declines in the cost of energy products and services, including gasoline and electricity.

“If the Fed was looking for data to point to to say, ‘We’re going to pause in June,’ I think they got it today,” said Liz Young, head of investment strategy at SoFi in New York.

“But it’s another one of those that you can cut whichever way you want to make your case. If you want to be bullish, you say inflation is down more than 50% since its peak. If you want to bearish, you can say inflation is still more than twice the Fed’s target,” Young said.

Traders have priced in a 93% chance that the U.S. central bank will hold interest rates at the 5%-5.25% range on Wednesday, and 62% odds of 25-basis-point hike in July, according to the CME Fedwatch tool.

The benchmark S&P 500 has recovered 22% from its October 2022 closing low, fueled in large part by gains in market heavyweights such as Apple , Nvidia and Tesla . More recently, sectors such as energy and materials have climbed, as well as small-cap stocks.

All S&P 500 sector indexes rose on Tuesday, led by materials, up 2.2%, followed by a 1.32% gain in energy as commodities including oil and copper climbed against a falling dollar. [O/R] [MET/L]

The small-cap Russell 2000 index jumped 1.4% to a three-month high.

U.S.-listed shares of Chinese companies climbed after China’s central bank lowered its short-term lending rate for the first time in 10 months. Alibaba Group gained 2.16% and jumped 3.8%.

The S&P 500 was up 0.69% at 4,368.75 points.

The Nasdaq gained 0.70% to 13,556.75 points, while the Dow Jones Industrial Average was up 0.48% at 34,230.02 points.

Apple Inc extended losses to slip 0.21%, a day after the iPhone maker unveiled a costly augmented-reality headset called the Vision Pro, barging into a market dominated by Meta.

Advanced Micro Devices rose 5.34% after Piper Sandler raised the price target on the stock to $150, the second highest on Wall Street, as per Refinitiv data.

Advancing issues outnumbered declining ones on the NYSE by a 3.47-to-1 ratio; on Nasdaq, a 2.59-to-1 ratio favored advancers.

The S&P 500 posted 17 new 52-week highs and 5 new lows; the Nasdaq Composite recorded 98 new highs and 69 new lows.

Harker echoed the same sentiment. “I am in the camp increasingly coming into this meeting thinking that we really should skip,” Harker said at an event on financial stability. That said, data due on Friday about the U.S. job market “may change my mind.”

Following their comment, fed funds futures have factored in a 70% chance the Fed will keep rates unchanged next month, up sharply from a 30% probability earlier in the wake of data showing an increase in U.S. job openings.

The Labor Department reported on Wednesday that U.S. job openings unexpectedly rose in April and data for the prior month was revised higher, pointing to persistent strength in the labor market.

The Job Openings and Labor Turnover Survey, or JOLTS report, also showed layoffs declined significantly last month. There were 1.8 job openings for every unemployed person in April, up from 1.7 in March, and well above the 1.0-1.2 range viewed as consistent with a jobs market that is not generating too much inflation.

After the JOLTS report, rate futures had priced in a nearly 70% chance of a rate increase next month.

“We have been suggesting that they (the Fed) stop,” said Ellis Phifer, managing director, fixed income capital markets at Raymond James in Memphis, Tennessee.

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