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(Bloomberg) — Stocks hit fresh all-time highs as a broad cooldown in inflation spurred a plunge in bond yields, with traders betting the Federal Reserve will be able to cut rates more than once this year.
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The S&P 500 topped 5,400 for the first time, with Wednesday marking the 20-month anniversary of the bull-market. A rally in Treasuries sent two-year yields down as much as 17 basis points as the US dollar dropped against all of its developed-world peers. Fed swaps now fully price in quarter-point rate cuts in November and December — and bets on a September reduction also rose.
In the run-up to the Fed decision, data showed the core consumer price index cooled to the slowest pace in more than three years. The figures may represent the early stages of inflation resuming a downward trend that would allow officials to cut rates.
“This report is exactly what the Fed needed to increase its confidence that inflation is subsiding and rate cuts are warranted in the months ahead,” said Ronald Temple at Lazard. “A September rate cut is very much back in play.”
The Fed is widely expected to hold its benchmark rate steady for a seventh consecutive meeting Wednesday. The rate decision and projections will be released at 2 p.m. in Washington. Fed Chair Jerome Powell will hold a press conference 30 minutes later.
Equities extended their bull run, with the S&P 500 now up 14% this year. Big tech is consolidating its leadership, with Tesla Inc., Apple Inc. and Nvidia Corp. rallying at least 4% Wednesday. Gains were also fueled by blowout earnings from Oracle Corp., which soared 12%. Lower bond rates also helped, with two-year yields set for their biggest slide since December. The euro rose 1%.
MSCI Rejects Plan to Add EU Debt to Government Bond Indexes
While the CPI data spurred a sigh of relief on Wall Street, policymakers have stressed that they’d need to see several months of price pressures receding before they consider lowering interest rates, especially with the latest solid jobs report.
To Krishna Guha at Evercore, the CPI data starts the clock on a potential September rate cut, but the Fed will need to see much more sustained progress to deliver that reduction, and will try to underline that point at its June meeting – something markets should be prepared for.
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“Powell is still very concerned about the employment report,” said Andrew Brenner at NatAlliance Securities. “And he is not your typical Fed governor who would want to take the ‘punchbowl off the table’, so we may have more legs. But the risk-reward is getting narrower.”
Chris Larkin at E*Trade from Morgan Stanley says “the story isn’t over” after CPI as the Fed has said it wants to see an established trend of falling inflation.
“A September cut is still in play — as long as we get more numbers like this one.”
The Federal Open Market Committee, which has held its benchmark rate at a two-decade high since July, was encouraged by a sharp decline in inflation in the second half of 2023 to pencil in a gradual reduction in rates this year. In March, the quarterly “dot plot” signaled three quarter-point cuts in 2024. But most recently bets had been mounting on fewer reductions.
“Altogether, this report probably shifts the focus back to two or three rate cuts in 2024,” said Jason Pride at Glenmede.
To Ian Lyngen at BMO Capital Markets, the softer read on inflation clears the path for the “dot plot” to signal 50 basis points of cuts this year.
“The Fed’s last mile toward price stability is getting shorter,” said Quincy Krosby at LPL Financial. “This should help the FOMC, today preparing its dot plot and fine tuning its statement, offer a more positive view regarding monetary easing despite invoking their well-practiced reminder that they remain data dependent and require additional confirmation that inflation continues to trend lower.”
David Russell at TradeStation notes that inflation is slowing even as the economy accelerates.
“Things are playing out as the Fed hoped, so Jerome Powell will probably be feeling good this afternoon,” he said. “September could be back in play for a rate cut. The bears have nowhere to run to and nowhere to hide.”
The S&P 500 is in its 12th bull market since 1955, according to Jim Paulsen, a retired well-known stock bull on Wall Street and author of the “Paulsen Perspectives” newsletter. Before its latest run to all-time highs, the fed funds rate was reduced prior to the start of every bull run — except once when the first cut occurred concurrently with the start of a bull in 1966.
In the prior 11 bull markets, borrowing costs were trimmed anywhere from 0 to 27 months before a new bull started, with an average lead time of 9.5 months, he said. That means Fed officials typically provided a supportive rate policy months before a new bull market emerged and kept cutting borrowing costs long after a new bull was in process.
Corporate Highlights:
Caterpillar Inc. hiked its dividend by about 8% and added $20 billion to its share buyback program after seeing strong performance from its division best known for making iconic yellow heavy-duty machinery.
FedEx Corp. plans to cut as many as 2,000 jobs in Europe, the latest move by the package-delivery giant to streamline its global workforce and rein in costs.
Southwest Airlines Co.’s chief executive officer is resisting pressure to step down after activist firm Elliott Investment Management took a $1.9 billion stake and called for new leadership at the carrier.
GameStop Corp. raised about $2.14 billion from a share sale program as it capitalized on a stock rally fueled by Keith Gill’s return to YouTube.
Investors in Adobe Inc. are increasingly on edge about competition from generative AI. The Photoshop maker’s results will illustrate how it’s coping with the threat.
Airbus SE is closing in on a large single-aisle jet order from Cebu Pacific Air, with the carrier planning to sign up for as many as 150 A320neo aircraft that would more than double the Asian airline’s fleet size.
Key events this week:
Eurozone industrial production, Thursday
US PPI, initial jobless claims, Thursday
Tesla annual meeting, Thursday
New York Fed President John Williams moderates a discussion with Treasury Secretary Janet Yellen, Thursday
Bank of Japan’s monetary policy decision, Friday
Chicago Fed President Austan Goolsbee speaks, Friday
US University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
The S&P 500 rose 1.1% as of 12:25 p.m. New York time
The Nasdaq 100 rose 1.3%
The Dow Jones Industrial Average rose 0.2%
The MSCI World Index rose 1.2%
Currencies
The Bloomberg Dollar Spot Index fell 0.5%
The euro rose 0.9% to $1.0842
The British pound rose 0.8% to $1.2845
The Japanese yen rose 0.9% to 155.78 per dollar
Cryptocurrencies
Bitcoin rose 3.4% to $69,569.98
Ether rose 3.6% to $3,612.56
Bonds
The yield on 10-year Treasuries declined 14 basis points to 4.26%
Germany’s 10-year yield declined nine basis points to 2.53%
Britain’s 10-year yield declined 14 basis points to 4.13%
Commodities
West Texas Intermediate crude rose 0.6% to $78.40 a barrel
Spot gold rose 0.8% to $2,335.83 an ounce
This story was produced with the assistance of Bloomberg Automation.
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