[New York Stock Market] Relief on May CPI Slowdown... S&P and Nasdaq Reach Record Highs Despite Fed's 'Hawkish' Rate Outlook

May CPI and Core CPI Growth Rates Slow Year-on-Year
Fed Holds Interest Rate Steady at 5.25~5.5% for 7th Consecutive Time
Year-End Rate Cut Forecasts Reduced from 3 to 1
Investors Focus on CPI Slowdown Despite Hawkish Rate Outlook

In the U.S. New York stock market, the S&P 500 index and the Nasdaq index reached record highs on the 12th (local time). Although the Federal Reserve (Fed) reduced the expected number of interest rate cuts this year from three to one, the market was reassured by the slowdown in the May Consumer Price Index (CPI) inflation rate and the Fed's assessment of progress on inflation.

On that day at the New York Stock Exchange (NYSE), the blue-chip-focused Dow Jones Industrial Average closed at 38,712.21, down 35.21 points (0.09%) from the previous trading day. The large-cap-focused S&P 500 index rose 45.71 points (0.85%) to 5,421.03, and the tech-heavy Nasdaq index jumped 264.89 points (1.53%) to 17,608.44, both marking all-time highs.

The slowdown in the May CPI inflation rate, released that morning, stimulated investor sentiment. According to the U.S. Department of Labor, last month's CPI and core CPI increased by 3.3% and 3.4% year-over-year, respectively, both below market expectations (3.4% and 3.5%) and the previous month's figures (3.4% and 3.6%). The core CPI inflation rate marked its lowest level in about three years for the second consecutive month. The decline in energy prices contributed to the drop in the CPI inflation rate.

A few hours after confirming the inflation slowdown signal, the Fed held its fourth FOMC meeting of the year and, as expected, kept the benchmark interest rate steady at 5.25% to 5.5% per annum. The market's focus was on the expected number of rate cuts this year, which was sharply reduced from three to one. In the dot plot released that day, the Fed raised its year-end interest rate forecast from 4.6% in March to 5.1%. Initially, it was expected that the Fed would cut rates three times by 0.25 percentage points each within the year from the current 5.25%-5.5%, but this time it signaled only one 0.25 percentage point cut. The 2025 rate forecast was revised upward from 3.9% to 4.1%, changing the expected cuts from three to four. The 2026 rate forecast remained unchanged at 3.1%. The medium- to long-term rate forecast was raised from 2.6% to 2.8%.

[Image source=Yonhap News]

The Fed's reduction in the expected number of rate cuts this year is related to the upward revision of inflation forecasts. In the Summary of Economic Projections (SEP) update released that day, the Fed raised the core Personal Consumption Expenditures (PCE) price index forecast for this year by 0.2 percentage points to 2.8%. It expects the rate to slow to 2.3% in 2025 and 2% in 2026. The GDP growth rate for this year is maintained at 2.1%, and the unemployment rate at 4%, consistent with previous forecasts.

Fed Chair Jerome Powell said at a press conference following the FOMC regular meeting, "There has been progress in the May CPI report, but it is not sufficient to ease policy," adding, "We need to wait for more confidence that inflation is slowing to the 2% target before cutting rates."

However, despite Powell's cautious stance and the Fed's upward revision of this year's rate forecast, investors were reassured by the easing of the May CPI and continued buying.

U.S. Treasury yields also declined. The two-year Treasury yield, sensitive to monetary policy, fell 7 basis points (1bp = 0.01 percentage points) to 4.75%, and the 10-year Treasury yield, a global bond yield benchmark, dropped 9 basis points to 4.31%.

Quincy Crosby, Chief Global Strategist at LPL Financial, said, "The data-dependent Fed is demanding a cooler inflation report before starting a rate easing cycle," adding, "Therefore, the dot plot likely reflects a reluctance to unnecessarily ease financial conditions."

Jay Hatfield, founder and Chief Investment Officer (CIO) of Infrastructure Capital, analyzed, "The CPI has neutralized the hawkish Fed. Most market participants believe the economy is slowing and that the Fed should cut rates. The market is ignoring the Fed's hawkish forecast of only one rate cut this year."

By individual stocks, financial stock Bank of America (BoA) rose 1.42%. Nvidia increased by 3.55%, and Broadcom rose 2.36%. Oracle surged 13.34% on news of strengthening cloud cooperation with Google and OpenAI despite earnings below market expectations. Apple jumped 2.86%, hitting another all-time high following the previous day. Apple surged 7.26% the day before on news that its AI service, Apple Intelligence, could stimulate iPhone replacement demand.

International oil prices rose due to heightened tensions in the Middle East. West Texas Intermediate (WTI) crude oil closed at $78.5 per barrel, up $0.6 (0.77%) from the previous day, and Brent crude, the global oil price benchmark, rose $0.68 (0.83%) to $82.6.