S&P 500 and Nasdaq Composite Scale New Highs, Inflation Cooled In May and Fed Holds Rates

Alexander Garcia
12 Jun, 2024
Miami

Market indexes built on the previous session's record highs as investors digested the latest update on inflation, and the Federal Reserve held rates steady as widely expected. 

Stocks opened higher, and Treasury yields edged lower after consumer price inflation eased in May, raising hopes for at least one rate cut before the year's end. 

The S&P 500 index and the Nasdaq Composite advanced more than 1% after consumer price and core inflation unexpectedly slowed in May. 

Stocks have been under pressure for a few weeks due to rate uncertainty and the dashed hopes of rate cuts, but strong earnings and cooling inflation have stoked the market advance in recent days. 

Despite the recent market volatility, the S&P 500 and the Nasdaq Composite closed at record highs, and in today's two bench mark indexes inched higher to set new records. 

At the start of the year, investors were looking for as many as four cuts, but those expectations have been lowered after the persistent inflation over the last eighteen months. 

Consumer price inflation peaked in June 2022 at 9.1%, and price pressures have steadily eased to 3% in June 2023. 

However, inflation has failed to move lower over the last year and ranged between 3% and 4%, and core inflation has also failed to budge as well. 

Despite eleven rate hikes in 2022 and 2023, inflation has failed to dip to the 2% target rate set by the Fed, indicating interest rates are not restrictive enough. 

The Federal Reserve left the fed funds rate range unchanged between 5.25% and 5.50%, at the end of the two-day policy meeting.  

The policymakers committee dialed back on the rate expectations and estimated rates to drop to 5.1% by the end of the year, down from March's estimate of as many as three rate cuts. 

The committee also held 2024's GDP growth outlook at 2.1% and the unemployment rate at 4.0%. 

But the committee revised its PCE inflation estimate to 2.6% from 2.4% in March and core inflation, which excludes food and energy price inflation, to 2.8% from 2.6%. 

Fed officials estimated as many as four rate cuts in 2025, the fed funds rate to drop to 4.1% by the end of 2025, and additional cuts to bring down interest rates to 3.1% in 2026. 

 

Consumer Price Inflation Cools In May but Stays elevated

The annual rate of consumer inflation unexpectedly cooled to 3.4% in May, the U.S. Bureau of Labor Statistics said on Wednesday. 

Consumer price inflation decreased for the second month in a row and fell from 3.5% in March to 3.4% in April. 

Food price inflation slowed to 2.1% from 2.2% in April, shelter inflation slowed to 5.4% from 5.5%, and transportation dropped 10.5% from 11.2%. 

The annual rate of core inflation slowed to 3.4% in May, the lowest rate since April 2021. 

On a monthly basis, consumer price inflation was unchanged from the previous month after rising 0.3% in April, and the monthly core rate of inflation slowed to 0.2% from 0.3% in the previous month. 

 

U.S. Indexes and Treasury Yields

The S&P 500 index increased 1.1% to 5,436.70, and the Nasdaq Composite advanced 1.8% to 17,660.57. 

The yield on 2-year Treasury notes edged lower to 4.69%, 10-year Treasury notes decreased to 4.29%, and 30-year Treasury bonds edged higher to 4.46%.

WTI crude oil increased $0.85 to $78.75 a barrel, and natural gas prices fell 8 cents to $3.04 a thermal unit.

Gold increased by $20.65 to $2,336.12 an ounce, and silver rose 85 cents to $30.10. 

The dollar index, which weighs the U.S. currency against a basket of foreign currencies, edged lower to 104.33.

 

U.S. Stock Movers

Oracle Corp. soared 11.1% to $138.61 despite the database developer reporting weaker-than-expected quarterly results. 

Investors bid up the stock after the company announced an artificial intelligence partnership with Google and OpenAI. 

Rubrik declined 1.8% to $34.48 after the cloud computing company reported a weaker-than-expected outlook despite reporting higher-than-expected quarterly revenue of $187 million. 

Rentokil Initial soared 14.5% to $30.89 after activist investor Trian Fund acquired a sizeable stake in the company. 

 

European Markets Halted a two-day Selloff, French Politics In Uncharted Territory 

European stock market indexes and bonds in the eurozone rebounded after two days of losses following France's surprise election announcement. 

The euro held firm for the second day in active trading as investors still assessed the impact of French President Macron's surprise and controversial announcement to dissolve lower house of the parliament and call a legislative election.  

The risky move threw French politics into turmoil and raised the prospect of the opposition winning control of the parliament, causing legislative gridlock and slowing down progress in lowering the government's debt, and deepening pension reforms. 

Macron's minority government has struggled to win support for its legislative agenda for the last two years. 

The results of the European Union election on Sunday showed the far-right political parties winning more seats, but the three leading blocs—the EPP, Renew Europe, and S&D—retained majority control after winning 407 of the 720 seats. 

However, the shift to the right led to political upheaval in France, Germany, Austria, and Belgium. 

French President Emmanuel Macron dissolved the parliament after the far-right National Rally Party garnered 31.5% of votes, more than 15.2% won by Macron's Renaissance party. 

On the economic front, Germany's inflation rose for the first time in five months, as initially estimated, Destatis confirmed Wednesday. 

Consumer price inflation in May accelerated to 2.4% from a stable 2.2% in April, which was the lowest level in three years. 

 

Europe Indexes and Yields

The DAX index increased by 1.4% to 18,630.86; the CAC-40 index rose by 0.97% to 7,864.70; and the FTSE 100 index advanced by 0.8% to 8,215.48. 

The yield on 10-year German bonds edged lower to 2.60%. French bonds inched lower to 3.20%; the UK gilts edged lower to 4.25%; and Italian bonds decreased to 4.03%.

The euro edged higher to $1.075; the British pound inched higher to $1.275; and the U.S. dollar weakened to 89.58 Swiss cents.

Brent crude decreased $0.78 to $82.70 a barrel, and the Dutch TTF natural gas rose by €0.79 to €34.93 per MWh.

 

Europe Stock Movers

French banks rebounded after two days of selloffs, and bond yields recovered. 

Societe Generale gained 0.9% to €23.08, Credit Agricole rose 2.4% to €13.90, and BNP Paribas advanced 1.7% to €61.79. 

Legal & General declined 5% to 230.89 pence after the newly appointed chief executive launched a restructuring plan to focus on three core units. 

Rentokil Initial plc soared 12.3% to 466.40 pence after activist investor Trian Fund Management acquired a substantial stake in the company. 

Skanska AB jumped 0.7% to SEK 186.90 after the Swedish construction company sold its multi-family rental business in Denmark to NREP for about 737 million Danish kroner, or 1.1 billion Swedish kronor. 

Landore Resource surged 33% to 3.80 pence after the gold mining company secured £3.7 million to expand its gold project in Northwestern Ontario, Canada. 

The BAM Gold Project, an early-stage development project, is estimated to have at least one million ounces of gold deposits. 

The company sold 153.47 million shares at a price of 2.40 pence per share in a two-tranche offering to investors, representing 49.56% of the enlarged share capital. 

 

Japan's Producer Price Inflation Accelerates Fourth Consecutive Month 

Benchmark indexes in Tokyo traded down on Wednesday, trimming gains from the week and erasing gains from the previous session. 

The Nikkei and the Topix indexes dropped more than 0.5% as investors reviewed the latest update on producer price inflation. 

Producer price inflation rose 2.4% in May and accelerated for the fourth month in a row, the Bank of Japan reported on Wednesday. 

Investors turned cautious after the annual pace of factory-gate price inflation rose faster than expected, stoking fears of an acceleration in consumer price inflation. 

Producer price inflation was positive for the 40th month in a row, indicating manufacturers are passing higher raw material prices on to consumers. 

Investors were also cautious ahead of the U.S. Federal Reserve's monetary policy decisions later in the day, and the central bank is widely anticipated to hold its interest rate range steady between 5.25% and 5.5%. 

The Japanese yen weakened to 157.23 against the U.S. dollar, and the yield on a 10-year Japanese government bond stayed below 1% at 0.98%. 

 

Japan Stock Movers 

The Nikkei 225 stock average declined 0.5% to 38,913.50, and the Topix index fell 0.7% to 2,756.88. 

Banks, tech companies, and vehicle makers were among the leading decliners. 

Mitsubishi UFJ, Mizuho Financial Group, and Sumitomo Mitsubishi declined between 0.5% and 1.5%. 

Softbank, Advantest, Tokyo Electron, and Screen Holdings traded mixed and ranged between a decline of 0.3% and a gain of 0.2%. 

Toyota Motor decreased 1.4% to ¥3,208.0, Honda Motor rose 0.1% to ¥1,710.0, and Nissan Motor fell 0.1% to ¥545.30. 

 

China Deflation Worries Keep Indexes In Hong Kong and Shanghai Down 

Market indexes in Shanghai and Hong Kong traded down after the release of inflation data. 

Consumer price inflation rose for the fourth month in a row in May, but the increase of 0.3% in May fell short of market expectations. 

On a monthly basis, inflation decreased 0.1% after rising 0.1% in April, indicating persistent demand weakness amid a protracted property market slump and fragile economic recovery. 

The annual pace of retail inflation was steady, but food price inflation fell for the 11th month in a row, the National Bureau of Statistics reported on Wednesday. 

Core inflation, which excludes food and energy prices, rose 0.6% from a year ago, compared to a 0.7% rise in April. 

In a separate report, the statistics bureau said producer price inflation declined 1.4% in May after falling at a 2.5% annual rate in April. 

The factory-gate prices fell for the 20th month in a row and fell at the slowest pace since February 2023, amid persistent domestic demand weakness and rising job market uncertainty outside of the top three cities. 

Over the first five months, producer price inflation dropped 2.4% from a year ago, and the prices are expected to remain weak for the rest of the year. 

 

China Stock Movers 

The CSI 300 index decreased 0.2% to 3,536.85, and the Hang Seng index dropped 1.5% to 17,913.10. 

The Hang Seng index extended losses to 9% from the peak last month, as the market rally appears to lose steam amid a lack of consistent policy support and an ongoing decline in the residential property market. 

Tech stocks traded lower amid broad market weakness, and Tencent Holdings declined 0.6% to HK$371.20 and Alibaba Group fell 0.9% to HK$74.15. 

Real estate developers were under pressure ahead of the U.S. Federal Reserve's monetary policy decisions at 2:00 p.m. ET later today. 

The Federal Reserve is widely anticipated to hold the Fed Funds rate range between 5.25% and 5.50%, and the central bank is likely to signal higher rates for the rest of the year. 

Hong Kong monetary policy moves in sync with U.S. announcements because the Hong Kong dollar is linked to the U.S. dollar. 

Higher interest rates for longer are likely to dampen demand for new properties in Hong Kong, amid an ongoing economic slowdown and elevated home prices in the city. 

China Vanke declined 0.9% to HK$5.45, China Resources Land dropped 2.9% to HK$26.70, and Sun Hung Kai fell 1.1% to HK$71.95. 

Wuhan Dameng Database, the database developer for banks and state-owned power entities' stock soared nearly 190% on the first day of trading after the company priced its initial offering at 250 yuan per share. 

Tencent-backed QuantumPharm priced its initial public offering at HK$5.28 and raised HK$989.3 million ahead of its listing on Thursday. 

The public offering of artificial intelligence-based drug research service provider was oversubscribed by 75 times.