US stocks rose on Wednesday after a new inflation reading showed consumer prices rose less than expected in May. The latest snapshot of inflation comes hours before the Federal Reserve’s upcoming afternoon meeting that will provide the latest signal on the path for interest rates.
The S&P 500 (^GSPC) built on its 27th record close of the year, rising more than 1.2%. The Nasdaq Composite (^IXIC) rose nearly 1.8%, also adding to a record close from the previous day. The Dow Jones Industrial Average (^DJI) also rose by about 0.5%.
The Consumer Price Index (CPI) remained flat over the previous month and rose 3.3% year-on-year in May – a deceleration from April’s 0.3% month-on-month increase and 3.4% year-over-year increase in prices. Both measures exceeded economists’ expectations. On a “core” basis, which excludes the more volatile costs of food and gas, prices in May rose 0.2% from the previous month and 3.4% from a year ago – lower than April data. Both measures were also better than economists’ estimates.
This has changed market expectations for federal interest rate cuts this year. After the data was released, markets were pricing in a roughly 69% chance that the Federal Reserve would start cutting interest rates by its September meeting. According to CME FedWatch data. This is up from the 53% probability the day before.
The 10-year Treasury yield (^TNX) fell about 14 basis points to 4.26%, its lowest level since April 1. Subsequently, interest rate sensitive areas of the market rose. The Russell 2000 (^RUT) small-cap index rose more than 3.1%.
Read more: How does the labor market affect inflation?
But all that could change later this afternoon. The Fed’s decision is a certainty – the central bank is expected to keep interest rates at their current highest levels in 23 years. Investors will be closely watching the release of the Fed’s updated economic outlook in its “dot chart” — specifically, the number of interest rate cuts it expects for the rest of the year.
Last we heard, in March, the number was three. Policymakers will almost certainly reduce this, thanks in part to the aforementioned flatness of inflation at the beginning of this year. These forecasts, along with what Fed Chairman Jerome Powell said in his press conference, may be the latest market-moving events on an unusually busy day.
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