U.S. stocks rise 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 100% expectation policy makers will leave rates unchanged on Wednesday. The market had priced in a 79.1% probability on Monday.

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,
+3.81%
and copper
HG00,
+1.83%
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,
+1.16%,
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.

“There are diverging opinions about what happens next. Some investors think that the Big Tech led equity rally should continue with the rest of the market due to catch up their technology peers. Some others think that the S&P 500’s fresh bull market is just an illusion and doesn’t mean that the bear market is over,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

“The S&P 500 is now approaching overbought conditions, which will bring some investors to take their profit and walk away. Big Tech, which saw the strongest rally this year, is potentially where the profit-taking will be happening,” she added.

Companies in focus

• Oracle Corp. shares
  ORCL,
  +2.34%
  rallied 5.5%, 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,
  -0.37%
  shares ticked up 0.1% 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,
  -0.34%
  shares rose 0.7%, after the home improvement retail giant affirmed the full-year earnings outlook it provided last month. 

• Manchester United shares
  MANU,
  +8.30%
  jumped 13% 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.