This morning, the attention of Wall Street is again on inflation and the role the Federal Reserve is playing in trying to tame it after a few much-anticipated reports yesterday each had a major influence on the direction of trading (see below). At 8:30 A.M. (EDT) today, the Labor Department reported data on producer (wholesale) prices for the month of May. Specifically, the Producer Price Index (PPI) fell 0.2% last month, which was down considerably from the 0.5% increase recorded in April. The core PPI, which excludes the more-volatile food and energy components, was unchanged, again weaker than expected. On a 12-month basis, the PPI and core PPI advanced 2.2% and 2.3%, respectively, again showing a slowing in the pace of price growth at the producer level.
In a separate Labor Department report, we also learned that initial jobless claims for the week ending June 8th totaled 242,000, which was well above the forecast of 225,000 and highest tally since August of 2023. This data suggest some softening in the labor sector. The equity futures, which were mixed heading into the economic news, are still indicating a bifurcated start to the trading day. The increased appetite for riskier assets is propelling the NASDAQ and S&P 500 futures higher, while advance contracts for Dow Jones Industrials are trading modestly lower in extended market action.
The stock market got off to a roaring start yesterday morning after the Labor Department released its latest reading on consumer prices. Specifically, the Consumer Price Index (CPI) was unchanged in May, compared to a 0.3% rise in April. This marked the lowest reading since May of 2020. The core CPI, which excludes food and energy, rose 0.2%, down from the April pace of 0.3%. On a 12-month basis, the CPI and core CPI advanced 3.3% and 3.4%, respectively, again showing a modest slowdown in consumer price growth.
In a nutshell, the report indicated that inflation at the consumer level eased in May. This more-benign data drove Treasury yields lower on the hopes that it would push the Federal Reserve to begin cutting rates, perhaps soon than expected. (The odds of a rate hike were pushed back to late in the year following last week’s stronger than anticipated labor market data.) This ignited another rally in the equity market, with investors gobbling up the stocks of higher-growth and interest-rate sensitive companies, including a number of technology and communication services names. The housing and housing-related stocks were also racing ahead on the possibility of lower rates later this year. Conversely, the consumer staples stocks were out of favor. Speaking of the technology sector, shares of Broadcom Inc. (AVGO) are up sharply in pre-market action after the semiconductor company reported April-quarter results and raised its full-year revenue and earnings-per-share guidance.
Then at 2:00 P.M. (EDT) yesterday, we got the latest monetary policy decision from the Federal Reserve. As expected, the Federal Open Market Committee (FOMC) kept the federal funds steady at 5.25% to 5.50%. This marked the seventh-consecutive meeting that the Fed paused on the interest-rate front, which is in uncharted territory. In all, the report was viewed as hawkish, as the central bank indicated that it won’t be appropriate to cut rates until it has gained greater confidence that inflation is heading lower. The lead bank is now forecasting one interest-rate cut this year, down from three in March, and four senior Fed officials think there should no reduction to the benchmark short-term interest this year. On average, the bank sees higher rates for 2024, 2025, and the long run.
From an economic perspective, the Federal Reserve said the economy is expanding at a moderate pace and did not change its GDP forecasts for this year and next. The central bank also noted that the labor market is softening a bit, but is still doing well, and we think this puts less pressure on the central bank to cut rates before late this year, if at all. Federal Reserve Chairman Jerome Powell noted in his post-statement press conference that “we see gradual cooling in inflation and moving toward better balance in the labor market.” We think the Fed’s solid economic outlook, and the fact that Wall Street doubting the central bank and pricing in more cuts than the Fed is projecting, owing to yesterday’s more-benign CPI data, kept stocks from retracing much of those earlier gains. Today’s PPI data also strengthens the Street’s thinking on monetary policy.
The market also believes that the Fed’s current stance was primarily based on lagging data and voting members did not fully consider the May decline in consumer inflation at this month’s monetary policy meeting. Treasury yields only retraced a portion of the earlier decline, likely reflecting the possibility the Fed could turn more dovish at future FOMC meetings if inflation continues to ease in the coming months.
Yesterday, the NASDAQ Composite and the broader S&P 500 Index, which contain many of the higher-growth stocks, rose 1.5% and 0.9%, respectively, and both finished at record highs. Likewise, the small-cap Russell 2000, which has struggled year to date due to interest-rate concerns, rallied by 1.6% yesterday. The large-cap Dow Jones Industrial Average was relatively unchanged, falling 0.1% for session. As noted, the equity futures are suggesting a similar pattern during today’s trading day stateside, at least at the start of the session. – William G. Ferguson
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
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