Wall Street is aflutter this morning after the Consumer Price Index (CPI) report showed a notable slowdown in inflation.
Indeed, the May CPI showed a 0% change in prices last month, with annual inflation at 3.3%, below market forecasts by 0.1% on both counts. Core inflation, which excludes the volatile Food and Energy categories, also came in better than projected, increasing 0.2% in May to 3.4% annually. That came in below respective estimates of 0.3% and 3.5%. It’s also the slowest core CPI reading since mid-2021.
In some ways, today’s inflation reading couldn’t have come at a better time with the Federal Reserve’s rate-hike decision due later today. Interest rate futures show that traders have even raised their expectations for a rate cut to come in September, from a 53% chance on Tuesday to a 71% chance after the CPI, per the CME FedWatch Tool.
While investors still aren’t confident that the Fed will cut rates three times this year, the CPI has certainly lifted the chances of such an occurrence.
Predictably, stocks are up big on the news. The S&P 500 and Nasdaq Composite are in the green 1.1% and 1.8%, respectively, as of this writing. Should the indices manage to hold onto their gains throughout the day, it would mean new all-time highs for the pair.
Promising May CPI Raises Hopes Ahead of Rate-Cut Decision
While the May CPI likely won’t move the needle for today’s rate-cut decision — investors have already overwhelmingly priced in no change to interest rates at today’s meeting — Wall Street will be eager to hear Fed Chair Jerome Powell’s thoughts on the inflation reading.
Should Powell adopt an optimistic view, it may affect the chances of even a July rate cut. Indeed, according to the CME Group, interest-rate futures show just a 14.5% chance of a rate reduction at the July policy meeting. Expect that number to change depending on Powell’s sentiment today.
Overall, however, today’s CPI can be seen as a notable win. That’s especially true considering disappointingly higher-than-expected inflation readings earlier this year.
“Today’s CPI report – at long last – suggests that the disinflationary trajectory has begun to edge lower towards the Fed’s price stability target,” noted Quincy Krosby, Chief Global Strategist at LPL Financial. “Since data releases are assessed through the lens of the Fed and the probability for rate cuts, the CPI report should help underscore that the Fed is nearing ever closer to its initiation of the rate easing cycle.”
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
