Shares jumped again this morning as fresh inflation data revealed a cool-down in price pressures for May. This fueled hope among investors that the Federal Reserve might take a break from hiking rates when they make their next policy decision tomorrow afternoon.
The Dow rose 182 points, notching a 0.5% increase, while the S&P climbed 0.7%. The tech-heavy Nasdaq Composite led the market, rising 0.8%. Both the S&P and the Nasdaq set their highest closing figures since April 2022 on Monday.
May’s Consumer Price Index (CPI) showed that inflation went up by 4% year-over-year (YoY) vs. 4.1% expected. That’s the index’s slowest yearly increase since March of 2021. Core CPI, excluding food and gas, moderated to +5.3% YoY, slightly exceeding the 5.2% estimate.
The Fed’s favorite inflation indicator, core services CPI excluding shelter, fell to 4.6% YoY last month, hitting a level unseen since March 2022.
Following the CPI release, rate hike odds plunged according to the CME Group’s FedWatch Tool. The chances of a hike tomorrow sunk to just 5.8%, down from 24% on Monday. This comes after 10 straight meetings where the Fed chose to hike rates.
“The Fed is likely to keep their options open by signaling at least one more rate hike by the end of 2023. This aligns with what the market expects. They’ll likely choose to ‘skip’ rather than pause for a long time to watch the effects of raising rates 5% since they started hiking,” said head iShares strategist Gargi Chaudhuri.
Tech shares stole the spotlight as relaxed inflation and steady rates sparked optimism for the industry. Oracle shares leaped 2.1% after they outperformed Wall Street’s forecasts for the fiscal fourth quarter. Shares of Netflix and Meta followed suit, jumping 2.2% and 0.8%, respectively.
The S&P is now trading 24% above its October low. With this boost, the broader market index has exceeded the basic threshold to be considered “in a bull market.”
But can stocks continue to climb at their breakneck pace? Probably not. Whether they’re long-term bullish or bearish, most analysts agree that stocks are currently out over their skis.
The question is:
What’s going to spark a selloff if the Fed isn’t raising rates?
Bank of America’s Fund Managers survey came out today, revealing that 59% of respondents anticipate at least one additional hike this year. The survey was conducted from June 2nd – 8th, and it reflects a major shift in expectations from May’s survey, in which only 39% of respondents held this opinion.
The bull market’s biggest risk is a hawkish Powell. If the Fed Chairman delivers a hawkish post-FOMC speech tomorrow, stocks should finally snap lower, rate hike or not. Will those losses stick, though?
Probably not; we mentioned several months ago that equities tend to rise until the Fed makes its final rate hike. If that’s coming in July, then stocks should rebound following the next dip. This would result in an excruciating few weeks for bears, many of whom would undoubtedly think that the top was in for the year.
But, without Powell’s admission that the US is in full-blown, “duck and cover recession mode” – AKA, the Fed is done hiking – investors will continue to hope for the best. Even if that means pushing equities further into overbought territory.