Market Snapshot: Dow rises 200 points after May inflation data underscores expectations for Fed pause

What’s driving markets

The U.S. consumer-price index rose 0.1% in May, with the year-over-year rate of inflation slowing to 4% from 4.9% in April, the lowest level since March 2021.

The so-called core rate of inflation that omits food and energy rose a stiffer 0.4%. Wall Street had forecast a 0.4% gain. The increase in the core rate over the past 12 months slipped to 5.3% from 5.5%, also the smallest gain since the fall of 2021. The headline and core readings were all in line with the average forecasts produced by a survey of economists by The Wall Street Journal.

The Federal Reserve views the core rate as a better predictor of inflation trends.

Such a decline in price pressures could help the Federal Reserve leave interest rates unchanged after its policy meeting Wednesday, a scenario that has contributed to a sturdy equity market rally of late.

“The CPI data has shown clearly that the Fed needs to take summer off now with respect to their monetary policy…In simple terms, it seems like there is less wood to chop for the Fed as inflation begins to cool down,” said Naeem Aslam, chief investment officer at Zaye Capital Markets.

After the data, fed-funds futures showed traders priced in a better-than-90% expectation policy makers will leave rates unchanged on Wednesday, according to the CME FedWatch tool. The market had priced in a 79.1% probability on Monday.

Still, if the Fed does pause its interest rate hike on Wednesday, “it won’t be surprising” to see some pullback of stocks, especially if the Fed officials stay hawkish in their statements, according to James Ragan, director of wealth management research at D.A. Davidson.

It is important to watch what Fed officials, including Fed chairman Jerome Powell, say about recent economic data and the path of the key policy rate by the end of this year, noted Ragan.

Earlier, U.S. stock-index futures were lifted after China eased monetary policy amid reports of more stimulus to come.

Hong Kong’s Hang Seng Index
HSI,
+0.60%
climbed 0.6%, Japan’s Nikkei 225
NIK,
+1.80%
rose 1.8% to hit a fresh 33-year high, while industrial commodities like oil
CL.1,
+3.93%
and copper
HG00,
+1.92%
gained ground on hopes of more demand from the world’s second-biggest economy.

The S&P 500 is up 12.5% over the past three months, taking its relative strength index.

Some market darlings have enjoyed even greater price surges. Shares of Tesla Inc.
TSLA,
+3.05%,
the sixth biggest S&P 500 constituent by market capitalization, are up 43% over the past three months, and have gained 103% for the year to date after claiming on Monday a record 12th successive day of gains.

Such bullishness may have bred injudicious calm. The Cboe VIX index
VIX,
-2.73%,
a gauge of expected S&P 500 volatility that usually rises at times of market stress, is around 15, well below its long-run average of 20.

“Most of this year’s market strength came with such weak breadth and while there was a decent broadening of sector strength over the last couple of weeks, it will take a strong earnings season that kicks off in mid-July to fundamentally confirm if the recent stock market rally can hold up,” said David Bahnsen, chief investment officer at The Bahnsen Group.

Companies in focus

• Oracle Corp. shares
  ORCL,
  +0.66%
  rose 1.6%, after the database company reported earnings and said AI customers have already signed contracts for more than $2 billion in new business.

• Apple Inc.
  AAPL,
  -0.42%
  shares fell 0.4% following three consecutive trading sessions of gains that saw a Monday close at a record high of $183.79. Apple shares were downgraded to neutral from buy at UBS.

• Home Depot Inc.
  HD,
  -0.10%
  shares dipped less than 0.1%, after the home improvement retail giant affirmed the full-year earnings outlook it provided last month. 

• Manchester United shares
  MANU,
  +13.09%
  jumped 11.3% following a report from Qatar’s Al-Watan that Qatar’s Sheikh Jassim bin Hamad al-Thani will soon be announced as the preferred bidder. 

—Jamie Chisholm contributed to the report.