- US inflation slows to 3.3% in May
- Wall Street surges at the open
- Fed holds benchmark rate at 5.25%-5.50%
4.10pm: Market cheers as Fed maintains rates
Stocks hit new highs by Wednesday's close following a mixed economic report: inflation data showed milder-than-expected price increases, while the Federal Reserve opted to maintain interest rates at high levels but revised down its projected rate cuts for the year to just one, down from three previously anticipated.
The S&P 500 closed at a record high of 5,421, gaining approximately 0.9%, while the Nasdaq also reached a new peak with a 1.5% rise to finish at 17,608. In contrast, the Dow Jones dipped slightly by 0.1% to 38,712.
The Fed highlighted "modest" progress in inflation and signaled caution in its approach to potential future rate cuts, with Chair Jerome Powell emphasizing a proactive stance rather than reactive measures in monetary policy.
Following the Fed meeting, market expectations for interest rate cuts have adjusted: there is now a 55% probability of a rate cut in September, down from 65% following the Consumer Price Index (CPI) report. The likelihood of a rate cut in December stands at 75%.
Analysts anticipate US interest rates to conclude the year at 4.88%, slightly below the Fed's median projection. This outlook is contingent on ongoing improvements in inflation metrics, which could prompt further adjustments in monetary policy.
"Until we get the next main data print, the core PCE, that is due for release later this month, we may not see too much adjustment in financial markets," Kathleen Brooks at XTB commented. "We think that interest rate expectations will stay around this level until the core PCE report."
2.45pm: Fed holds steady
The Federal Reserve maintained interest rates at a 23-year high of 5.25%-5.50% and reduced its forecast for rate cuts this year from three to one.
The Fed also adjusted its 2024 inflation outlook to 2.8% from 2.6% and expressed increased optimism about achieving its 2% inflation target, noting "modest further progress" towards this goal.
12.05pm: Solid stock gains
The S&P 500 and Nasdaq Composite index have continued to enjoy gains through the morning half of the session on Wednesday, up 1.1% and 1.8%.
"Just when all hope of a rate cut in 2024 seemed lost, today’s CPI reading has provided fresh reasons to expect a cut this year," says Chris Beauchamp, chief market analyst at IG.
The US Fed decision is still to come in a couple of hours, and could still surprise the market.
"The past few sessions had seen stock markets hit by several blows," says Beauchamp, pointing to last Friday's strong jobs reading and the surprise French election, but the US morning session has seen "a classic risk-on move – stocks are up, and the dollar and volatility are both down".
"Today’s post-CPI reaction shows there is still plenty of money prepared to get behind further gains in equities, though the Fed meeting tonight could still be a trigger for more volatility."
The inflation data shouldn’t lead investors to expect a rate cut at the Fed’s meeting later today, says Alex McGrath, chief investment officer for NorthEnd Private Wealth.
"The question for the markets now becomes is a 0.1% miss enough to justify rate cuts from our friends at the Fed? Color us skeptical on that front.
"Sure, there can be a small celebration about the progress we have made but the fact remains that three years into this cycle inflation is still running at 3.3% yoy, well above the target.
"If the goal of the Fed is to keep rates restrictive until inflation returns to target, we have many miles to go before we can rest."
11.35am: Oracle tops the S&P leaderboard
Oracle is the highest riser in the S&P 500 this morning, up 10% after its AI-linked mega deals announced afterhours, which have also led to analysts upping targets this morning.
Dan Coatsworth, investment analyst at AJ Bell, said the news last night helped the market to "have a new hook on which to hang the AI hype".
The combination of Apple's AI announcements and Oracle reporting big demand for AI-related activities, "has given investors something new to talk about and two different ways to play the theme instead of relying on chip giant Nvidia", he said.
10.30am: Favourable market conditions
Strong institutional flows and a welcome slowing in US inflation have "added to the most favourable market conditions for some time," says Jeff O’Connor, Liquidnet's head of market structure for the Americas.
"The optimism that has grown in recent weeks has been buoyed even further today by the increasing likelihood of rates cuts as early as September.
"While we are edging closer to the cyclical summer lull, conditions suggest that the market has the potential to move even higher.
"Heightened volumes, gains across a broad spectrum of strategies and strong hedge fund performance suggest that institutions are enjoying current market conditions. While geopolitical uncertainty hums in the background, if conditions continue to hold, we can expect institutions to continue to ride the wave – taking advantage of improving sentiment and plentiful liquidity."
9.49am: US stocks rally at the open
Wall Street has rallied at the open, with today's cool inflation data boosting the hopes for a rate cut later this year.
The Dow Jones lifted by 0.8%, or 312 points, to 39,090, while the Nasdaq jumped more than 1%, 178 points, to 17,523.
Meanwhile, the S&P 500 rose 0.9%, or 50 points, to 5,425.
Economists have welcomed easing inflation, arguing it will increase the likelihood of a September rate cut and drive dovish sentiment through the Federal Reserve.
Kathleen Brooks at XTB said: "Heading into the CPI report it felt like the latest inflation data would determine the outcome of tonight’s Fed meeting.
"The market has already priced in a dovish Fed: there is now a 65% chance of a September rate cut.
"The risk is that the market has got ahead of themselves pricing in a September rate cut. After all, the Fed will need to balance strong payroll growth alongside falling inflation when it makes its policy decision.
Not only is there a 65% of a September rate cut, but the US interest rate futures market is also pricing in a 75% chance of a second cut in December.
"As we lead up to tonight’s Fed meeting, the Fed will either be king maker, or the king of disappointment for traders later today."
8.41am: US inflation cooler-than-expected
US stocks are set to open higher after inflation came in softer than expected, increasing the prospect of an interest rate cut later this year.
Core inflation, which removes volatile fuel and food prices, was 3.4% for May, softening from the prior month's 3.6% rise and coming in lower than the 3.5% analysts had predicted.
Headline CPI inflation eased to 3.3% in May from April's 3.4% and beating consensus by one tenth of a percentage point.
Lower-than-expected inflation will prove a boost for the Federal Reserve, which is meeting today to set interest rates and has been looking for positive data to justify a cut later this year.
All three of the US's lead stock indexes are up, according to premarket futures.
It comes after both the S&P 500 and Nasdaq closed at record highs on Tuesday, with the former having been boosted by Apple reclaiming its spot as the second-largest company in the world.
Apple shares slipped 0.7% in pre-market trading, having closed yesterday around 7.5% higher at a new record high.