Cooler Inflation Powers Market Rally as Investors Await Rate Decision

Barry Adams
13 Jun, 2023
New York City

Stocks rallied, crude oil rebounded and Treasury yields inched higher after consumer price inflation eased.  

Consumer price inflation in May decreased to 4.0% after energy prices weakened and food price inflation slowed but shelter inflation drove the inflation higher. 

Attention now shifted to the release of wholesale price inflation before the market opening tomorrow and the Fed's rate decision early afternoon tomorrow.  

Most market participants are expecting the Federal Reserve to stay on the sidelines after the latest inflation report showed progress. 

But the Federal Reserve may focus on core inflation, which has stayed stubbornly high after ten rate hikes in a row since March 2022, and increase rate at the end of the next policy meeting Wednesday. 

Crude oil rebounded after declining for four days in a row after the People's Bank of China cut its short term lending rate by 10 basis points to support weak economic recovery. 

 

Overall CPI Eased In May, Core Inflation Stayed Elevated 

Consumer price index for May eased to 4.0% in May on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported Tuesday. 

The inflation rate dropped to the slowest pace since March 2021, but prices are still rising at a faster pace than preferred by the Federal Reserve. 

On a monthly basis prices rose 0.1% in May, slower than 0.4% rise in April. 

Core inflation, which excludes food and energy, slowed to 5.3% in May from 5.5% in April, the slowest annual pace since November 2021. 

The shelter index increased 8.0% over the last year, accounting for over 60% of the total increase in all items less food and energy. 

 

U.S. Indexes & Yields 

The S&P 500 index increased 0.7% to 4,369.01 and the Nasdaq Composite added 0.8% to 13,573.32. 

The yield on 2-year Treasury notes increased to 4.52%, 10-year Treasury notes edged down to 3.72% and 30-year Treasury bonds eased 3.88%. 

Crude oil increased $1.94 to $69.05 a barrel and natural gas prices increased 8 cents to $2.34 a thermal unit. 

 

U.S. Stock Movers

Oracle Corporation jumped 4.8% to $122 after the database developer reported better-than-expected fiscal fourth quarter results. 

GameStop Corp surged 6% to $25.80 after Chairman Ryan Cohen disclosed in a regulatory filing the purchase of 443,842 shares of the video game developer. 

The purchase amounts to $10.8 million based on Monday's closing price.

Exxon Mobil and Chevron Corporation edged up 1.4% after crude oil prices rebounded. 

Home builders were in focus after inflation dropped in May raising hopes that the Federal Reserve will pause its rate hike cycle at the end of a two-day meeting on Wednesday. 

Lennar Corp, Toll Brothers Inc, PulteGroup and NVR Inc advanced between 0.6% and 1.2%. 

 

European Markets Rebounded

European markets traded in a tight range after German inflation eased and China unexpectedly lowered interest rates. 

Benchmark indexes traded sideways after German inflation declined in May but core inflation stayed above 5% for the sixth month in a row, highlighting widespread price pressures in the economy. 

Moreover, China unexpectedly lowered its short term lending rate to revive economic growth. 

The People's Bank of China lowered its seven day reverse repo rate by 10 basis points to 1.9% from 2.0%. 

The unusual move to lower short term rate before lowering the long term rate, highlights the sense of urgency felt by the policymakers in shoring the economy. 

The central bank is likely to lower its benchmark loan prime lending rate used for mortgage and consumer lending by the same amount next Tuesday. 

 

German Inflation Eased, Core Inflation Stayed Above 5% 

German inflation eased to 6.1% from a year ago in May, the Federal Statistics Office said Tuesday. 

Inflation slowed from 7.2% in April and price increase was the weakest since March 2022 when prices rose 5.9%. 

Inflation when measured on the EU-harmonized basis decreased to 6.3% from 7.6% in April. 

Energy price inflation slowed to 2.6% in May from 6.8% in April but food price inflation remained elevated at 14.9% despite easing from 17.2% in April.  

Food prices remained the main driver of inflation among all product groups. Excluding energy prices, inflation rose 6.5% and excluding food and energy, inflation was 5.4%. 

Core inflation, which excludes food and energy, has been above 5% since December 2022 and has accelerated every month since then reaching high of 5.8% in March and April before trending lower in May. 

On a monthly basis, consumer price inflation declined 0.1% in May, reversing 0.4% increase in April. 

 

Europe Indexes & Yields 

The DAX index increased 0.8% to 16,230.68, the CAC-40 index increased 0.6% to 7,289.83 and the FTSE 100 index traded down 0.3% to 7,594.80. 

The yield on 10-year German Bunds inched higher to 2.37%, French bonds traded higher to 2.91%, the UK gilts edged up to 4.40% and Italian bonds decreased to 4.05%.

The euro edged lower to $1.079, the British pound to $1.256 and the Swiss franc to 90.62 cents.

Brent crude increased $2.16 to $73.98 a barrel and the Dutch TTF natural gas decreased €5.06 to €36.05 per MWh.

 

Europe Stock Movers

Luxury stocks in Paris advanced after China lowered its short term lending rate to shore up weak economic recovery. 

LVMH increased 0.2% to €836.50 and Hermes International SCA edged up 0.1% to €1,975.60. 

Mining and resource companies traded higher following a rebound in base metal and crude oil prices. 

Antofagasta, Anglo American and Glencore jumped between 2% and 4%. 

Centrica Plc fell 0.8% to  117.05 pence after the company posted strong results in the first five months of 2023 and reiterated its annual outlook near the top end of the market expectations. 

Durr Group increased 4% after the plant engineering company said it has agreed to acquire BBS Automation Group.