Wall street breathes a sigh of relief, but the Federal Reserve isn't joining the party
A palpable sense of optimism swept through the trading floors of New York this week, a welcome change from the nervous energy that has defined much of the year. For months, investors and analysts have been locked in a tense waiting game, poring over every economic release for clues about the direction of inflation and, consequently, the intentions of the US Federal Reserve. The central question has been simple, yet profound: when will the cost of living stop its relentless climb, and when will the central bank feel confident enough to begin lowering the interest rates that have put a strain on households and businesses alike? On Wednesday morning, it seemed the market finally received the answer it was desperate to hear. The release of the May Consumer Price Index (CPI) report felt less like a data point and more like a permission slip for the bulls to run. Inflation, the stubborn spectre haunting the economic recovery, had cooled more than anyone had dared to predict. The S&P 500 and the tech-heavy Nasdaq Composite responded immediately, surging to fresh all-time highs as the news filtered out. It was a moment of pure, unadulterated relief. Yet, in the world of finance, euphoria is often fleeting. Just a few hours later, the Federal Reserve delivered its own verdict, and it was a far more sober assessment of the road ahead, reminding everyone that one good report does not make a summer of celebration.
Inflation's Fever Finally Breaks
The numbers themselves were the source of the market's initial jubilation. The headline CPI for May was completely flat from the previous month, the first time in nearly two years it had not registered an increase. On an annual basis, inflation came in at 3.3 per cent, a noticeable cooling from April's figure and a tick below economists' forecasts. Perhaps more importantly for the Federal Reserve, the 'core' CPI, which strips out volatile food and energy prices, also showed significant moderation. It rose by just 0.2 per cent month-on-month and 3.4 per cent year-on-year, the slowest annual pace in over three years. This was precisely the kind of data investors had been waiting for. It suggested that the Fed's aggressive campaign of interest rate rises was finally having its desired effect, taming price pressures without causing a deep economic downturn. The market's reaction was swift and decisive. Technology stocks, which are particularly sensitive to interest rate expectations, led the charge. Shares in Apple Inc. (AAPL) continued their impressive run, briefly overtaking Microsoft (MSFT) as the world's most valuable company after unveiling new artificial intelligence features. Chipmaker NVIDIA (NVDA), the undisputed star of the 2024 market, also saw its stock move higher, pushing its market capitalisation further into the stratosphere. The S&P 500 sailed past the 5,400 mark for the first time in its history, a significant psychological milestone. For market participants, the data was a clear signal that the economic environment was becoming more favourable for equities.
"This was the ideal inflation report for the market and the Fed. It shows inflation is continuing on a downward path, which should give the Fed more confidence to start dialling back on policy restraint later this year," noted Seema Shah, Chief Global Strategist at Principal Asset Management.
The sentiment was echoed across Wall Street. The bond market also joined the rally, with Treasury yields, which move opposite to prices, falling sharply. The yield on the 2-year Treasury note, a key barometer of Fed policy expectations, saw one of its biggest daily drops of the year. Traders in the futures market began to more confidently price in the possibility of an interest rate reduction as early as September. The data suggested the 'soft landing' narrative – in which inflation returns to target without a recession – was not just a hopeful fantasy but a plausible reality. The broad-based nature of the stock market rally, extending beyond just the mega-cap technology names, further supported the view that a healthier economic backdrop was taking hold, providing a foundation for corporate earnings in the months to come.
A Sobering Message from the Central Bank
Just as the celebratory mood was taking hold, Federal Reserve Chair JeromPowell stepped up to the podium for his post-meeting press conference, delivering a message that served as a firm dose of reality. While he acknowledged the May inflation report as "a step in the right direction," the central bank's actions and projections spoke with a much more cautious tone. As expected, the Federal Open Market Committee (FOMC) held its benchmark interest rate steady in the 5.25 to 5.50 per cent range, where it has been since last July. The real news, however, was in the committee's updated economic projections, colloquially known as the 'dot plot'. This chart, which maps out where each Fed official expects interest rates to be in the future, showed a significant hawkish shift. The median projection now points to just one quarter-point interest rate reduction in 2024, a stark revision from the three cuts that were anticipated back in March. This change told the market that despite the encouraging inflation reading, the Fed's governing body remains unconvinced that the battle against rising prices has been conclusively won. Chair Powell was careful in his language, but the underlying message was clear: the Fed is in no hurry to cut rates. He repeatedly stressed the need for more evidence and "greater confidence" that inflation is moving sustainably back down towards their 2 per cent target. The implication is that a single month of good data, however welcome, is not enough to alter their patient and data-dependent approach.
"We see today's report as progress and as, you know, building confidence. But we don't see ourselves as having the confidence that would warrant beginning to loosen policy at this time," Mr. Powell stated during his press conference.
This careful stance places the market in an intriguing position. While stock indexes managed to hold onto most of their gains for the day, the Fed's message capped the initial exuberance. It sets up a dynamic for the remainder of the summer where every major economic data release, from monthly jobs figures to the Personal Consumption Expenditures (PCE) price index – the Fed's preferred inflation gauge – will be scrutinised with even greater intensity. The divergence is clear: investors, buoyed by signs of cooling inflation, are eager for monetary policy to ease. The Federal Reserve, scarred by the inflation spike of the past few years, remains staunchly committed to its mandate, willing to wait until it is absolutely certain the threat has passed. For now, Wall Street is content to celebrate the good news, but it does so with the knowledge that the ultimate arbiter of its fate, the central bank, is watching and waiting with a far more wary eye.
Disclaimer: The views and recommendations made above are those of individual analysts or brokerage companies, and not of Winvesta. We advise investors to check with certified experts before making any investment decisions.
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A palpable sense of optimism swept through the trading floors of New York this week, a welcome change from the nervous energy that has defined much of the year. For months, investors and analysts have been locked in a tense waiting game, poring over every economic release for clues about the direction of inflation and, consequently, the intentions of the US Federal Reserve. The central question has been simple, yet profound: when will the cost of living stop its relentless climb, and when will the central bank feel confident enough to begin lowering the interest rates that have put a strain on households and businesses alike? On Wednesday morning, it seemed the market finally received the answer it was desperate to hear. The release of the May Consumer Price Index (CPI) report felt less like a data point and more like a permission slip for the bulls to run. Inflation, the stubborn spectre haunting the economic recovery, had cooled more than anyone had dared to predict. The S&P 500 and the tech-heavy Nasdaq Composite responded immediately, surging to fresh all-time highs as the news filtered out. It was a moment of pure, unadulterated relief. Yet, in the world of finance, euphoria is often fleeting. Just a few hours later, the Federal Reserve delivered its own verdict, and it was a far more sober assessment of the road ahead, reminding everyone that one good report does not make a summer of celebration.
Inflation's Fever Finally Breaks
The numbers themselves were the source of the market's initial jubilation. The headline CPI for May was completely flat from the previous month, the first time in nearly two years it had not registered an increase. On an annual basis, inflation came in at 3.3 per cent, a noticeable cooling from April's figure and a tick below economists' forecasts. Perhaps more importantly for the Federal Reserve, the 'core' CPI, which strips out volatile food and energy prices, also showed significant moderation. It rose by just 0.2 per cent month-on-month and 3.4 per cent year-on-year, the slowest annual pace in over three years. This was precisely the kind of data investors had been waiting for. It suggested that the Fed's aggressive campaign of interest rate rises was finally having its desired effect, taming price pressures without causing a deep economic downturn. The market's reaction was swift and decisive. Technology stocks, which are particularly sensitive to interest rate expectations, led the charge. Shares in Apple Inc. (AAPL) continued their impressive run, briefly overtaking Microsoft (MSFT) as the world's most valuable company after unveiling new artificial intelligence features. Chipmaker NVIDIA (NVDA), the undisputed star of the 2024 market, also saw its stock move higher, pushing its market capitalisation further into the stratosphere. The S&P 500 sailed past the 5,400 mark for the first time in its history, a significant psychological milestone. For market participants, the data was a clear signal that the economic environment was becoming more favourable for equities.
"This was the ideal inflation report for the market and the Fed. It shows inflation is continuing on a downward path, which should give the Fed more confidence to start dialling back on policy restraint later this year," noted Seema Shah, Chief Global Strategist at Principal Asset Management.
The sentiment was echoed across Wall Street. The bond market also joined the rally, with Treasury yields, which move opposite to prices, falling sharply. The yield on the 2-year Treasury note, a key barometer of Fed policy expectations, saw one of its biggest daily drops of the year. Traders in the futures market began to more confidently price in the possibility of an interest rate reduction as early as September. The data suggested the 'soft landing' narrative – in which inflation returns to target without a recession – was not just a hopeful fantasy but a plausible reality. The broad-based nature of the stock market rally, extending beyond just the mega-cap technology names, further supported the view that a healthier economic backdrop was taking hold, providing a foundation for corporate earnings in the months to come.
A Sobering Message from the Central Bank
Just as the celebratory mood was taking hold, Federal Reserve Chair JeromPowell stepped up to the podium for his post-meeting press conference, delivering a message that served as a firm dose of reality. While he acknowledged the May inflation report as "a step in the right direction," the central bank's actions and projections spoke with a much more cautious tone. As expected, the Federal Open Market Committee (FOMC) held its benchmark interest rate steady in the 5.25 to 5.50 per cent range, where it has been since last July. The real news, however, was in the committee's updated economic projections, colloquially known as the 'dot plot'. This chart, which maps out where each Fed official expects interest rates to be in the future, showed a significant hawkish shift. The median projection now points to just one quarter-point interest rate reduction in 2024, a stark revision from the three cuts that were anticipated back in March. This change told the market that despite the encouraging inflation reading, the Fed's governing body remains unconvinced that the battle against rising prices has been conclusively won. Chair Powell was careful in his language, but the underlying message was clear: the Fed is in no hurry to cut rates. He repeatedly stressed the need for more evidence and "greater confidence" that inflation is moving sustainably back down towards their 2 per cent target. The implication is that a single month of good data, however welcome, is not enough to alter their patient and data-dependent approach.
"We see today's report as progress and as, you know, building confidence. But we don't see ourselves as having the confidence that would warrant beginning to loosen policy at this time," Mr. Powell stated during his press conference.
This careful stance places the market in an intriguing position. While stock indexes managed to hold onto most of their gains for the day, the Fed's message capped the initial exuberance. It sets up a dynamic for the remainder of the summer where every major economic data release, from monthly jobs figures to the Personal Consumption Expenditures (PCE) price index – the Fed's preferred inflation gauge – will be scrutinised with even greater intensity. The divergence is clear: investors, buoyed by signs of cooling inflation, are eager for monetary policy to ease. The Federal Reserve, scarred by the inflation spike of the past few years, remains staunchly committed to its mandate, willing to wait until it is absolutely certain the threat has passed. For now, Wall Street is content to celebrate the good news, but it does so with the knowledge that the ultimate arbiter of its fate, the central bank, is watching and waiting with a far more wary eye.
Disclaimer: The views and recommendations made above are those of individual analysts or brokerage companies, and not of Winvesta. We advise investors to check with certified experts before making any investment decisions.
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