Editor’s Note: Article has been updated with additional information.
A softer-than-expected April inflation report and cooler retail sales data sparked broad-based rallies in risky assets Wednesday, as traders grew more confident in the likelihood of Fed rate cuts this year.
Both the S&P 500 and the tech-heavy Nasdaq 100 indices opened the session at fresh record highs, completing their rebound after April’s temporary dip.
Chart of The Day: S&P 500, Nasdaq 100 Rise To All-Time Highs As Inflation Looks Less Scary
What Happened: The headline Consumer Price Index (CPI) inflation slowed from 3.5% to 3.4% year-over-year in April 2024, matching estimates. On a monthly basis, it decelerated from 0.4% to 0.3%.
When excluding energy and food items, core inflation cooled from 3.8% to 3.6% year-over-year, as expected, hitting the lowest level in three years.
Simultaneously, the April’s retail sales report indicated a flat monthly change, marking a sharp deceleration from the downwardly revised 0.6% surge in March, and notably below the expected 0.4%.
Why it matters: Before Wednesday’s data, traders had anticipated about 50 basis points of rate cuts in the fed funds rate by year-end.
The benign inflation report breaks a concerning three-month streak of higher-than-expected inflation readings and reignites hopes of a steady return to the Fed’s 2% target.
Traders are currently assigning a 73% chance of a first rate cut in September, up from the 62% one a day earlier, according to CME Group’s FedWatch Tool.
Overall money markets currently factor in 55 basis points of rate cuts in 2024, indicating increasing investor bets on a looser Fed policy going forward.
Market reactions: Rate-sensitive 2-year Treasury yields tumbled by 8 basis points to 4.73%, breaking below the crucial 200-day moving average.
The SPDR S&P 500 ETF Trust (NYSE:SPY) was 0.5% higher at 09:35 a.m. in New York. The Invesco QQQ Trust (NASDAQ:QQQ) also rose 0.5%.
Sector-wise, real estate stocks, as tracked by the Real Estate Select Sector SPDR Fund (NYSE:XLRE) rallied 1.7%.
The Utilities Select Sector SPDR Fund (NYSE:XLU) moved 1.1% higher.
Energy stocks, as tracked by the Energy Select Sector SPDR Fund (NYSE:XLE) were the major laggards, down 1.4%.
Blue-chip stocks, as tracked by the SPDR Dow Jones Industrial Average ETF (NYSE:DIA), inched 0.3% higher.
Small caps outperformed larger cap stocks, with the iShares Russell 2000 ETF (NYSE:IWM) up 1.2%, early April levels.
Bitcoin (CRYPTO: BTC) rallied over 4%.
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