S&P 500 Tops 5,400 as US Yields Tumble Before Fed: Markets Wrap

(Bloomberg) — Stocks hit fresh all-time highs as a broad cooldown in inflation spurred a plunge in bond yields, with traders betting the Federal Reserve will be able to cut rates more than once this year.

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The S&P 500 topped 5,400 for the first time, with gains led by its most-influential group: technology. A rally in Treasuries sent two-year yields down as much as 17 basis points as the US dollar dropped against all of its developed-world peers. Fed swaps now fully price in quarter-point rate cuts in November and December — and bets on a September reduction also rose.

In the run-up to the Fed decision, data showed the core consumer price index cooled to the slowest pace in more than three years. The figures may represent the early stages of inflation resuming a downward trend that would allow officials to cut rates.

“This report is exactly what the Fed needed to increase its confidence that inflation is subsiding and rate cuts are warranted in the months ahead,” said Ronald Temple at Lazard. “A September rate cut is very much back in play.”

The Fed is widely expected to hold its benchmark rate steady for a seventh consecutive meeting Wednesday. The rate decision and projections will be released at 2 p.m. in Washington. Fed Chair Jerome Powell will hold a press conference 30 minutes later.

Almost every major group in the S&P 500 advanced, with megacaps like Apple Inc. and Nvidia Corp. up at least 3%. The rally in tech was also fueled by a blowout earnings from Oracle Corp., which soared 10%. Lower bond rates also helped, with two-year yields set for their biggest slide since December. The euro rose 1%.

While the CPI data spurred a sigh of relief on Wall Street, policymakers have stressed that they’d need to see several months of price pressures receding before they consider lowering interest rates, especially with the latest solid jobs report.

To Krishna Guha at Evercore, this print starts the clock on a potential September rate cut, but the Fed will need to see much more sustained progress to deliver that reduction, and will try to underline that point at its June meeting – something markets should be prepared for.

“The story isn’t over, since the Fed has said it wants to see an established trend of falling inflation before it lowers rates,” said Chris Larkin at E*Trade from Morgan Stanley. “But a September cut is still in play — as long as we get more numbers like this one.”

Story continues

The Federal Open Market Committee, which has held its benchmark rate at a two-decade high since July, was encouraged by a sharp decline in inflation in the second half of 2023 to pencil in a gradual reduction in rates this year. In March, the quarterly “dot plot” signaled three quarter-point cuts in 2024. But most recently bets had been mounting on fewer reductions.

“Altogether, this report probably shifts the focus back to two or three rate cuts in 2024,” said Jason Pride at Glenmede.

More Comments on CPI:

As we hear from the Fed later today, today’s inflation data should be another feather in the cap for Chairman Powell and raise the confidence for the rest of the voting members. More importantly, as we look further out on the calendar, the distance from here to the first rate cut of the cycle appears to be rapidly approaching.

US inflation has proven sticker than anticipated so far in 2024, so today’s print will be welcomed by the market. That said, it may be premature to extrapolate this single data point and we would expect the Fed to continue to exert caution, with the prospect of limited rate cuts over the remainder of this year. Ongoing data will continue to be scrutinised as the underlying economic picture emerges.

The cool inflation numbers should boost investor confidence for a Fed rate cut in the second half of 2024, but will the Fed throw gasoline or cold water on the fire when it comes to rate cuts?

Today’s inflation report is a step in the right direction as investors look for clues from Chair Powell on what the Fed’s next steps might be.

The Fed’s last mile toward price stability is getting shorter.

This should help the FOMC, today preparing its dot plot and fine tuning its statement, offer a more positive view regarding monetary easing despite invoking their well-practiced reminder that they remain data dependent and require additional confirmation that inflation continues to trend lower.

Softer inflation is good news for the Federal Reserve. Despite a good report this morning, the Fed will still likely communicate this afternoon their intentions to keep rates higher for longer in their updated summary of economic projections. The updated dot plot will likely signal only two rate cuts this year, a change from the three cuts communicated back in March.

Disinflation is back—the bump up in inflation data over the past few months is proving to be temporary. That makes life so much easier for the Federal Reserve: employment is strong, and inflation is dropping.

Inflation is slowing even as the economy accelerates. Things are playing out as the Fed hoped, so Jerome Powell will probably be feeling good this afternoon. September could be back in play for a rate cut. The bears have nowhere to run to and nowhere to hide.

May CPI was softer than expected across headline and core readings, indicating the disinflation process is playing out. This keeps the Fed on track for cuts in 2024, with the first cut likely coming in September, especially with the unemployment rate at 4% and risk of going higher.

Disinflation strikes back. While these figures are unlikely to influence today’s Fed decision, they could be significant for the July meeting. Expectations of lower rates should bolster equities and bonds.

Today’s soft CPI puts the Fed back in the driver’s seat to steer towards a precautionary cut later this year to ensure recession remains remote. Until greater disinflation evidence is seen both in breadth and depth, today’s softness is supportive of a preemptive cut rather than a pivot in Fed policy towards accommodation.

Overall, it was a universally softer read on inflation than the market was expecting. Moreover, it clears the path for the ‘dot plot’ to signal 50 bp of cuts in 2024 and ensures that Powell will offer a dovish tone.

This fall provides evidence that monetary policy is having its intended effect and brings the economy one step closer to the Fed’s target of 2%. If inflation drops consistently in the coming months, central bankers should be convinced to finally reduce interest rates.

Chances of a 2024 rate cut remain balanced. Inflation is certainly not raising, but neither is it falling fast. With a strong and healthy job market, the Fed can stick to its historical playbook and keep rates well above CPI.

A calm CPI report. This CPI report gives the Fed the flexibility to still cut rates. We still expect the Fed to hold off until after the election though.

Corporate Highlights:

• GameStop Corp. raised about $2.14 billion from a share sale program as it capitalized on a stock rally fueled by Keith Gill’s return to YouTube.

• FedEx Corp. plans to cut as many as 2,000 jobs in Europe, the latest move by the package-delivery giant to streamline its global workforce and rein in costs.

• Investors in Adobe Inc. are increasingly on edge about competition from generative AI. The Photoshop maker’s results will illustrate how it’s coping with the threat.

Key events this week:

• Eurozone industrial production, Thursday

• US PPI, initial jobless claims, Thursday

• Tesla annual meeting, Thursday

• New York Fed President John Williams moderates a discussion with Treasury Secretary Janet Yellen, Thursday

• Bank of Japan’s monetary policy decision, Friday

• Chicago Fed President Austan Goolsbee speaks, Friday

• US University of Michigan consumer sentiment, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 1.1% as of 11:17 a.m. New York time

• The Nasdaq 100 rose 1.4%

• The Dow Jones Industrial Average rose 0.4%

• The Stoxx Europe 600 rose 1.1%

• The MSCI World Index rose 1.2%

Currencies

• The Bloomberg Dollar Spot Index fell 0.5%

• The euro rose 1% to $1.0845

• The British pound rose 0.8% to $1.2836

• The Japanese yen rose 0.8% to 155.81 per dollar

Cryptocurrencies

• Bitcoin rose 3.7% to $69,751.95

• Ether rose 3.9% to $3,623.1

Bonds

• The yield on 10-year Treasuries declined 14 basis points to 4.27%

• Germany’s 10-year yield declined eight basis points to 2.54%

• Britain’s 10-year yield declined 14 basis points to 4.13%

Commodities

• West Texas Intermediate crude was little changed

• Spot gold rose 0.4% to $2,327 an ounce

This story was produced with the assistance of Bloomberg Automation.

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