Wall street exhales as inflation eases, but a cautious Fed kerbs the enthusiasm
There was a palpable tension across trading floors this morning, a collective holding of breath as Wall Street awaited the figures that could set the tone for the summer. For weeks, investors have been caught in a tug-of-war, pulled between resilient corporate earnings and the nagging fear that stubborn inflation would compel the US Federal Reserve to keep its monetary policy painfully tight. Every economic data point has been scrutinised with forensic intensity, but none more so than the Consumer Price Index (CPI), the nation’s foremost inflation gauge. When the numbers for May finally flashed across screens, the initial reaction was not a bang, but a quiet, profound sigh of relief that rippled through the markets, sending stocks surging to fresh records. The data showed that consumer prices were flat for the month, the first time in nearly two years there had been no monthly increase, a development that instantly ignited hopes of an impending interest rate cut. It was a moment of pure, data-driven optimism, a glimmer of light suggesting the long and arduous fight against rising prices might finally be turning a corner. Yet, the day was a tale of two halves, as the elation from the morning’s inflation report would soon be tempered by a sobering message from the very institution at the centre of everyone’s attention: the Federal Reserve itself.
A Welcome Chill in the Inflation Numbers
The May CPI report was, by almost every measure, better than anticipated. Headline inflation registered a flat 0.0% from the previous month, defying economists’ forecasts of a modest 0.1% rise. On an annual basis, the figure cooled to 3.3%, a welcome step down from April's 3.4%. Perhaps more importantly for market-watchers, the core CPI, which strips out the volatile food and energy components, also came in softer than expected. It rose by just 0.2% month-on-month and 3.4% year-on-year, its slowest annual pace in over three years. The details of the report were just as encouraging; a significant 2.0% fall in petrol prices was a major contributor to the flat headline reading, offering some respite to consumers at the pump. The cost of airfares, new vehicles, and household furnishings also declined, painting a picture of moderating price pressures across several sectors of the economy. The market’s response was immediate and unequivocal. The S&P 500 sailed past the 5,400 mark for the first time in its history, closing the day up 0.85% at a new record high. The tech-heavy Nasdaq Composite fared even better, jumping 1.53% to its own fresh peak, buoyed by the prospect of lower borrowing costs, which particularly benefits growth-oriented technology companies. Apple briefly overtook Microsoft as the world’s most valuable company, its shares climbing almost 3% after recently detailing its much-anticipated foray into artificial intelligence. The bond market joined the celebration, with Treasury yields falling sharply as traders increased their wagers on a September rate cut from the Fed.
"Today’s report is a very good one for the Fed. Not only did headline CPI come in lower than expected, but the composition was also encouraging, with shelter inflation finally beginning to cool. It should give the Fed the confidence it’s been looking for," commented Seema Shah, Chief Global Strategist at Principal Asset Management.
This single data release seemed to wash away weeks of anxiety. The narrative of ‘higher-for-longer’ interest rates, which had dominated market discourse, was suddenly being questioned. For investors, the data was not just a number; it was confirmation that the Fed's aggressive series of rate hikes was indeed working its way through the economy, cooling demand without causing a significant downturn. The so-called ‘soft landing’ scenario, where inflation returns to the central bank's 2% target without triggering a painful recession, appeared more plausible than it had in months. The positive sentiment was widespread, with nearly every sector of the S&P 500 finishing in positive territory, illustrating the broad-based nature of the relief rally.
The Fed's Dose of Sobering Reality
Just as the celebratory mood was taking hold, Federal Reserve Chair Jerome Powell stepped up to the podium for his post-meeting press conference, delivering a message steeped in caution. While he acknowledged the encouraging inflation print, the overall tone was one of patience and prudence. The central bank, as expected, held its key interest rate steady in the 5.25% to 5.50% range. The real story, however, was in the Fed’s updated economic projections, colloquially known as the "dot plot". This chart, which maps out each official’s expectation for the future path of interest rates, showed a significant hawkish shift. The median projection now points to just one quarter-point rate cut in 2024, a stark reduction from the three cuts that were pencilled in back in March. This adjustment served as a clear signal that while officials are pleased with the direction of inflation, they are far from convinced that the battle is won. They need to see more than just one month of good data before committing to a change in policy. Powell himself reinforced this message, stating that the Fed’s policy-setting committee needs "greater confidence" that inflation is moving sustainably down to its 2% target before it would be appropriate to ease policy. He described the latest inflation readings as a move in the right direction but stressed that the committee remains highly attentive to inflation risks.
"The dot plots are a bit of a distraction, as they will be revised again in September. The Fed is clearly in a 'wait and see' mode and the timing of the first cut will be determined by the monthly inflation data over the next few months," noted Brian Coulton, Chief Economist at Fitch Ratings, suggesting the market should focus more on incoming data than the Fed's own fickle forecasts.
This dose of central bank realism managed to pour some cold water on the market's earlier euphoria. While stocks held onto a majority of their gains, the initial explosive rally was pared back as investors digested the Fed's more measured outlook. The day ended as a microcosm of the current market environment: investors are desperate for good news on inflation and ready to celebrate any positive sign, but the Federal Reserve remains the stern guardian at the gate, unwilling to open the door to lower rates prematurely. The path forward remains utterly dependent on the economic reports of the coming months. For now, Wall Street can enjoy a moment of reprieve, buoyed by the coolest inflation report in recent memory. But the knowledge that the Fed is watching, waiting, and demanding more proof means that the tension, while eased, has far from disappeared.
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.
Ready to earn on every trade?
Invest in 11,000+ US stocks & ETFs
There was a palpable tension across trading floors this morning, a collective holding of breath as Wall Street awaited the figures that could set the tone for the summer. For weeks, investors have been caught in a tug-of-war, pulled between resilient corporate earnings and the nagging fear that stubborn inflation would compel the US Federal Reserve to keep its monetary policy painfully tight. Every economic data point has been scrutinised with forensic intensity, but none more so than the Consumer Price Index (CPI), the nation’s foremost inflation gauge. When the numbers for May finally flashed across screens, the initial reaction was not a bang, but a quiet, profound sigh of relief that rippled through the markets, sending stocks surging to fresh records. The data showed that consumer prices were flat for the month, the first time in nearly two years there had been no monthly increase, a development that instantly ignited hopes of an impending interest rate cut. It was a moment of pure, data-driven optimism, a glimmer of light suggesting the long and arduous fight against rising prices might finally be turning a corner. Yet, the day was a tale of two halves, as the elation from the morning’s inflation report would soon be tempered by a sobering message from the very institution at the centre of everyone’s attention: the Federal Reserve itself.
A Welcome Chill in the Inflation Numbers
The May CPI report was, by almost every measure, better than anticipated. Headline inflation registered a flat 0.0% from the previous month, defying economists’ forecasts of a modest 0.1% rise. On an annual basis, the figure cooled to 3.3%, a welcome step down from April's 3.4%. Perhaps more importantly for market-watchers, the core CPI, which strips out the volatile food and energy components, also came in softer than expected. It rose by just 0.2% month-on-month and 3.4% year-on-year, its slowest annual pace in over three years. The details of the report were just as encouraging; a significant 2.0% fall in petrol prices was a major contributor to the flat headline reading, offering some respite to consumers at the pump. The cost of airfares, new vehicles, and household furnishings also declined, painting a picture of moderating price pressures across several sectors of the economy. The market’s response was immediate and unequivocal. The S&P 500 sailed past the 5,400 mark for the first time in its history, closing the day up 0.85% at a new record high. The tech-heavy Nasdaq Composite fared even better, jumping 1.53% to its own fresh peak, buoyed by the prospect of lower borrowing costs, which particularly benefits growth-oriented technology companies. Apple briefly overtook Microsoft as the world’s most valuable company, its shares climbing almost 3% after recently detailing its much-anticipated foray into artificial intelligence. The bond market joined the celebration, with Treasury yields falling sharply as traders increased their wagers on a September rate cut from the Fed.
"Today’s report is a very good one for the Fed. Not only did headline CPI come in lower than expected, but the composition was also encouraging, with shelter inflation finally beginning to cool. It should give the Fed the confidence it’s been looking for," commented Seema Shah, Chief Global Strategist at Principal Asset Management.
This single data release seemed to wash away weeks of anxiety. The narrative of ‘higher-for-longer’ interest rates, which had dominated market discourse, was suddenly being questioned. For investors, the data was not just a number; it was confirmation that the Fed's aggressive series of rate hikes was indeed working its way through the economy, cooling demand without causing a significant downturn. The so-called ‘soft landing’ scenario, where inflation returns to the central bank's 2% target without triggering a painful recession, appeared more plausible than it had in months. The positive sentiment was widespread, with nearly every sector of the S&P 500 finishing in positive territory, illustrating the broad-based nature of the relief rally.
The Fed's Dose of Sobering Reality
Just as the celebratory mood was taking hold, Federal Reserve Chair Jerome Powell stepped up to the podium for his post-meeting press conference, delivering a message steeped in caution. While he acknowledged the encouraging inflation print, the overall tone was one of patience and prudence. The central bank, as expected, held its key interest rate steady in the 5.25% to 5.50% range. The real story, however, was in the Fed’s updated economic projections, colloquially known as the "dot plot". This chart, which maps out each official’s expectation for the future path of interest rates, showed a significant hawkish shift. The median projection now points to just one quarter-point rate cut in 2024, a stark reduction from the three cuts that were pencilled in back in March. This adjustment served as a clear signal that while officials are pleased with the direction of inflation, they are far from convinced that the battle is won. They need to see more than just one month of good data before committing to a change in policy. Powell himself reinforced this message, stating that the Fed’s policy-setting committee needs "greater confidence" that inflation is moving sustainably down to its 2% target before it would be appropriate to ease policy. He described the latest inflation readings as a move in the right direction but stressed that the committee remains highly attentive to inflation risks.
"The dot plots are a bit of a distraction, as they will be revised again in September. The Fed is clearly in a 'wait and see' mode and the timing of the first cut will be determined by the monthly inflation data over the next few months," noted Brian Coulton, Chief Economist at Fitch Ratings, suggesting the market should focus more on incoming data than the Fed's own fickle forecasts.
This dose of central bank realism managed to pour some cold water on the market's earlier euphoria. While stocks held onto a majority of their gains, the initial explosive rally was pared back as investors digested the Fed's more measured outlook. The day ended as a microcosm of the current market environment: investors are desperate for good news on inflation and ready to celebrate any positive sign, but the Federal Reserve remains the stern guardian at the gate, unwilling to open the door to lower rates prematurely. The path forward remains utterly dependent on the economic reports of the coming months. For now, Wall Street can enjoy a moment of reprieve, buoyed by the coolest inflation report in recent memory. But the knowledge that the Fed is watching, waiting, and demanding more proof means that the tension, while eased, has far from disappeared.
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.
Ready to earn on every trade?
Invest in 11,000+ US stocks & ETFs