CPI and Core CPI Inflation Both 'Below Expectations'
Gasoline Price Decline Contributes to CPI Slowdown
September Pivot Outlook Spreads...10bp Drop in Treasury Yields
Focus on FOMC Policy Statement and Dot Plot Impact
The three major indices of the U.S. New York stock market are all showing upward trends in the early trading session on the 12th (local time). Optimism that inflation is being controlled spread as the slowdown in the May Consumer Price Index (CPI) inflation rate was confirmed about five hours before the Federal Open Market Committee (FOMC) meeting scheduled for the afternoon. U.S. Treasury yields have plunged by more than 10 basis points. The market is closely watching how the CPI data will affect the FOMC policy statement and interest rate outlook to be released in about four hours.
As of 9:33 a.m. at the New York Stock Exchange (NYSE) on the day, the Dow Jones Industrial Average was trading at 39,010.21, up 0.68% from the previous session. The S&P 500, which focuses on large-cap stocks, rose 0.85% to 5,421.13, and the tech-heavy Nasdaq index jumped 1.2% to 17,552.35.
By individual stocks, financial firm Bank of America (BoA) is up 2.51%. With inflation slowing and expectations for interest rate cuts spreading, tech stocks are also rising across the board. Nvidia is up 1.5%, Broadcom is up 2.69%. Oracle surged 12% on news that it plans to strengthen cloud cooperation with Google and OpenAI despite earnings falling short of market expectations. Apple, which hit an all-time high the previous day, is also up 1.25%. Apple surged 7.26% the previous day, reclaiming the second spot in market capitalization from Nvidia, on news that its AI service 'Apple Intelligence' could stimulate iPhone replacement demand.
The May CPI data released this morning signaled progress in reducing inflation. The U.S. Department of Labor announced that the May CPI rose 3.3% year-over-year, below both the forecast (3.4%) and the previous month (3.4%). The month-over-month increase was 0%, below the forecast (0.1%) and the previous month (0.3%). The core CPI, which the Fed closely monitors, rose 0.2% month-over-month and 3.4% year-over-year. The year-over-year increase was the lowest in about three years since April 2021 for the second consecutive month. Both the market expectations (0.3%, 3.5%) and the previous month (0.3%, 3.6%) were exceeded, signaling a slowdown in inflation. The core CPI excludes volatile energy and food prices to show the underlying trend in prices. The supercore inflation, which represents core service prices excluding housing and energy, fell 0.04% month-over-month, marking the first negative growth rate since 2021.
Falling energy prices contributed to the decline in the CPI inflation rate. Gasoline prices dropped 3.6% month-over-month, after rising 2.8% the previous month. As a result, overall energy prices shifted from a 1.1% increase in April to a 2% decline last month. Airfares, new cars, telecommunications, and clothing prices also fell. On the other hand, housing costs, a major driver of CPI increases, rose 0.4% month-over-month, maintaining the April increase of 0.4%. Medical care, used cars and trucks, and education costs increased.
With the May CPI and core CPI inflation slowing faster than expected, expectations for a rate cut in September are rapidly spreading in the market. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds futures market is currently pricing in about a 70% chance that the Fed will cut rates by at least 0.25 percentage points at the September FOMC meeting. This is a sharp increase from about 52% just the day before.
U.S. Treasury yields are also plunging. The two-year Treasury yield, sensitive to monetary policy, fell 13 basis points from the previous trading day to 4.69%. The 10-year Treasury yield, a global benchmark for bond yields, dropped 10 basis points to 4.29%.
Investors are focusing on the fourth regular FOMC meeting of the year, held this afternoon. Attention is on how the inflation slowdown signals will affect the policy statement and the dot plot reflecting rate cut expectations. The Fed is likely to keep the benchmark interest rate unchanged at 5.25?5.5% for the seventh consecutive time immediately after the FOMC meeting. The key issue is the revision of the dot plot. In March, the Fed maintained its previous forecast (from December last year) that rates would be cut three times by 0.25 percentage points each this year, but this meeting is expected to reduce the number of rate cut projections to two or fewer.
Ashwin Alankar, Global Head of Asset Allocation at Janus Henderson Investors, analyzed, "Today's CPI data will enable the Fed to pivot toward a preventive rate cut by the end of this year, helping to avoid a recession."
International oil prices are rising amid concerns about inventory reductions in the second half of this year. West Texas Intermediate (WTI) crude oil is trading at $78.86 per barrel, up $0.96 (1.2%) from the previous trading day, and Brent crude, the global oil price benchmark, is up $0.88 (1.1%) at $82.80.
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