Fundamental Analysis

Equities Surge as US Inflation Eases, Confirming Bets of a Fed Pause

  • Data released indicated a modest increase in US consumer prices in May.
  • Investors are more confident that the Federal Reserve will not raise interest rates on Wednesday.
  • The S&P 500 index has rebounded by approximately 22% from its lowest closing point in October 2022.

Equities rose on Tuesday amid optimism of a looming Fed pause. The S&P 500 and Nasdaq achieved their highest closing points in 14 months. This was driven by the data release indicating a modest increase in consumer prices in May. As a result, investors are now more confident that the Fed will not lift interest rates on Wednesday.

Nvidia experienced a significant increase of 3.9% and became the first chipmaker to reach a market capitalization exceeding $1 trillion. On the other hand, Advanced Micro Devices, a smaller rival, saw a decline of 3.6% in its stock value. This was triggered by an update on its artificial intelligence strategy, which failed to impress investors.

US inflation: (Source: Bureau of Labor Statistics)

US inflation: (Source: Bureau of Labor Statistics)

The stock market advanced following a report from the US Labor Department, revealing a 0.1% rise in the consumer price index for the previous month. This followed a 0.4% increase in April, with core inflation remaining at 0.4%.

Additionally, headline inflation rose by a lower-than-expected 4.0% year-on-year basis. This was primarily due to lower energy costs, including gasoline and electricity.

Traders placed a 95% probability that the US central bank would maintain interest rates within the 5%-5.25% range on Wednesday. Furthermore, there is a 62% chance of a 25bps rate hike in July, according to the CME Fedwatch tool.

The S&P 500 index has rebounded by approximately 22% from its lowest closing point in October 2022. This growth has been driven, to a large extent, by gains in major market players like Apple Inc, Nvidia Corp, and Tesla Inc. Recently, the energy and materials sectors have also seen positive movement, along with small-cap stocks.

European equities also experienced an increase on Tuesday after the US inflation report. In addition, the mining sector saw a rally as metal prices surged following rate cuts by China.

The European Central Bank is scheduled for its policy meeting on Thursday. The ECB is anticipated to raise rates by another 25bps to address persistent inflation concerns. Recent remarks from ECB speakers have indicated the possibility of extending the timeframe for potential rate hikes until September.