Weaker Inflation Expectations Lifts S&P 500 to 13-month Peak

Barry Adams
12 Jun, 2023
New York City

Stocks traded higher as rate-pause expectations drove trading sentiment. 

Market indexes advanced and investors looked ahead to the release of the consumer inflation index on Tuesday and producer price inflation on Wednesday. 

Investors are hoping that consumer inflation in May will slow to 4.0% from 4.95 in April, reflecting the decline in energy prices and weaker food inflation. 

But the market may be surprised if service inflation and higher shelter cost may keep overall inflation elevated. investors will also closely monitor core inflation, which excludes food and energy prices. 

The Federal Reserve is also scheduled to announce its rate decision on Wednesday and investors are divided about the rate path. 

Some investors are hoping that the Fed may pause rate hikes at June and July meetings and acknowledge the decline in inflation, while others are looking for the central bank to lift rates higher because inflation is still significantly above the 2% target. 

Despite ten rate hikes over the last sixteen months, stubborn inflation is well anchored and has spread from goods to services. 

The S&P 500 index crossed 4,300 for the first time since August 2022 and gained for the fourth week in a row. 

The index is likely to advance further if the Fed announces pause in rate hike on Wednesday. 

Despite recent gains in the benchmark index, market rally is driven by few large cap tech companies and caught many investors by surprise amid looming economic slowdown, elevated inflation and corporate earnings recession. 

Japan's Wholesale Prices Dropped to 2-year Low 

Japan's wholesale prices rose 5.1% in May, slower than 5.8% in April, the Bank of Japan reported Monday. 

Producer Price index rose at a slower pace for the fifth month in a row and at the slowest pace since July 2021. 

On a monthly basis the producer price index declined 0.7% in May and swung to a decline for the first time since February.   

 

U.S. Indexes & Yields 

The S&P 500 index increased 0.5% to 4,321.57 and the Nasdaq Composite added 1.1% to 13,401.41. 

The yield on 2-year Treasury notes increased to 4.55%, 10-year Treasury notes edged down to 3.77% and 30-year Treasury bonds eased 3.92%. 

Crude oil decreased $2.75 to $67.41 a barrel and natural gas prices decreased 2 cent to $2.23 a thermal unit. 

 

U.S. Stock Movers

Nasdaq Inc declined 8.2% to $53.13 after the exchange operator agreed to acquire financial software developer Adenza from Thoma Bravo for $10.5 billion.

The company plans to pay $5.75 billion in cash and offer 85.6 million Nasdaq shares or about 14.5% of its outstanding shares.  

Illumina, Inc increased 2.9% to $206.50 after the company said chief executive Francis deSouza resigned following pressure from activist investor Carl Icahn. 

JP Morgan Chase & Company declined 0.2% to $140.75 after the New York-based bank said it has reached an agreement in connection with crimes of sexual predator Jeffrey Epstein. 

"The parties in Jane Doe 1 v. JPMorgan Chase Bank, N.A. have informed the Court that they have reached an agreement in principle to settle the putative class action lawsuit related to Jeffrey Epstein’s crimes, which is subject to court approval," the bank announced in a news release on Monday. 

The settlement does not include ongoing litigation between the U.S. Virgin Islands and the bank and JPMorgan Chase’s claims against Jes Staley, former bank executive and friends with Jeff Epstein. 

 

In Cautious Trading European Markets Advanced 

European markets traded higher in cautious trading ahead of rate decisions this week. 

Major averages in London, Paris and Frankfurt advanced and bond yields edged slightly lower. 

Investors are anticipating the European Central Bank to lift its policy rate by 25 basis points but market participants appear to be divided on the future rate path in the U.S. 

The U.S. Federal Reserve is expected to announce its rate decision on Wednesday, the European Central Bank of Thursday and the Bank of Japan on Friday. 

Resource and energy stocks traded lower after crude oil prices eased for the third day in a row on demand growth worries. Natural gas prices declined after traders took profit following a sharp rally in the previous week. 

In the absence of economic news, investors debated recent economic data. The economy in the eurozone entered a technical recession after the first quarter growth was revised to a contraction of 0.1%, matching the performance in the previous quarter. 

China's producer prices fell for the eighth month in a row and dropped at the sharpest pace in seven years in May, highlighting uneven and weak economic rebound and weak consumer demand.  

 

Europe Indexes & Yields 

The DAX index increased 0.9% to 16,087.86,  the CAC-40 index increased 0.5% to 7,250.35 and the FTSE 100 index traded up 0.1% to 7,570.69. 

The yield on 10-year German Bunds inched lower to 2.37%, French bonds traded lower to 2.90%, the UK gilts edged up to 4.34% and Italian bonds decreased to 4.06%.

The euro edged lower to $1.078, the British pound to $1.258 and the.  Swiss franc to 90.36 cents.

Brent crude decreased $2.45 to $72.31 a barrel and the Dutch TTF natural gas decreased €1.01 to €31.04 per MWh.

Natural gas prices eased 8% after last week's rally of 35% and investors took profit despite falling supplies and weak demand in the region. U.S. natural gas supplies are diverted to the Asian markets because of growing demand for cooling to combat elevated temperatures. 

Turkstream pipeline which transports natural gas from Russia to Turkey has been shut down for maintenance work. 

Norway's Equinor delayed the restart of its Hammerfest LNG plant to June 14 because of technical difficulties. 

Despite the restricted natural gas supply, storage facilities in the European Union are 70.4% full and the region's government is looking to rebuild its storage to 90% by November 1.  

 

Europe Stock Movers

UBS Group AG increased 0.5% to CHF 18.29 after the Swiss bank said it has completed the purchase of Credit Suisse Group AG.   

Novartis Group AG increased 1% to CHF 90.99 after the Swiss pharmaceutical company agreed to acquire Seattle-based biotech company Chinook Therapeutics for up to $3.5 billion.

Telecom Italia SpA declined 1.3% to €0.25 after the company received two revised offers from existing bidders for its NetCo unit. 

Tullow Oil Plc declined 1.5% to 25.33 pence after the UK-based energy explorer said it is open to all possibilities for its oil field in Ivory Coast. 

SES SA declined 15.60% to €4.71 after the Paris-based satellite company said its chief executive Steve Collar will leave the company at the end of June. 

Frasers Group increased 0.4% to 687.50 pence after UK-based retailer said it has acquired 18.9% stake in the online electrical retailer AO World Plc for £75 million.