The US stock market closed higher on Tuesday, as investors welcomed the latest inflation data that showed a modest increase in consumer prices in May. The report eased concerns that the Federal Reserve might raise interest rates sooner than expected to curb inflationary pressures.
Inflation data below expectations
The US Labor Department reported that the consumer price index (CPI) rose 0.1% in May, following a 0.4% jump in April. The core CPI, which excludes food and energy, also rose 0.1%, matching the lowest increase since February 2020. On a year-on-year basis, the headline CPI increased by 4.0%, while the core CPI rose by 3.8%. Both figures were below the consensus estimates of 4.1% and 3.9%, respectively.
The inflation data suggested that the recent surge in prices was largely driven by temporary factors, such as supply chain disruptions, pent-up demand, and base effects from the pandemic. The report also indicated that some of the inflationary pressures were easing, as the cost of energy products and services, including gasoline and electricity, declined in May.
The inflation data was closely watched by investors, as it could influence the Fed’s monetary policy decisions. The central bank has maintained that the current spike in inflation is transitory and that it will keep its ultra-accommodative stance until the economy achieves its goals of maximum employment and stable prices. However, some market participants have been worried that the Fed might have to tighten its policy sooner than anticipated if inflation proves to be more persistent and widespread.
Stocks react positively to inflation data
The stock market reacted positively to the inflation data, as it reduced the odds of a premature rate hike by the Fed. The S&P 500 and the Nasdaq Composite both reached their highest closes in 14 months, gaining 0.69% and 0.70%, respectively. The Dow Jones Industrial Average also rose 0.48%, ending a five-day losing streak.
All 11 sectors of the S&P 500 advanced, led by materials, up 2.2%, followed by energy, up 1.32%. The tech-heavy Nasdaq was boosted by the strong performance of chipmakers, such as Nvidia, which jumped 3.9% and became the first semiconductor company to end a trading session with a market capitalization above $1 trillion. The small-cap Russell 2000 index also climbed 1.4% to a three-month high.
The stock market also benefited from the positive sentiment in the global markets, as China’s central bank lowered its short-term lending rate for the first time in 10 months, signaling its willingness to support the economic recovery. U.S.-listed shares of Chinese companies, such as Alibaba and JD.com, rose 2.16% and 3.8%, respectively.
Fed meeting in focus
The market attention will now turn to the Fed’s two-day policy meeting, which will conclude on Wednesday. The Fed is widely expected to keep its interest rates unchanged at the 5%-5.25% range, as well as its monthly bond purchases at $120 billion. However, investors will be looking for any clues on the Fed’s outlook for inflation and the economy, as well as its plans for tapering its asset purchases.
According to the CME FedWatch tool, traders have priced in a 93% chance that the Fed will hold rates steady on Wednesday, and a 62% chance of a 25-basis-point hike in July. The Fed’s updated projections and the post-meeting press conference by Chair Jerome Powell will be closely scrutinized for any hints on the Fed’s policy stance and its reaction to the inflation data.
Some analysts believe that the Fed will acknowledge the improvement in the economic conditions and the rise in inflation, but will also reiterate its view that the inflation spike is temporary and that it is not ready to change its policy course yet. Others, however, think that the Fed might signal that it is starting to discuss the possibility of tapering its bond purchases, which could be seen as a hawkish move by the market.
