[New York Stock Market] CPI Below Expectations Leads to Broad Gains... Nasdaq Up 1.15%

The three major indices of the U.S. New York stock market all closed higher on the 12th (local time) as the June Consumer Price Index (CPI) came in slower than expected, boosting hopes for a soft landing and the final stages of tightening. The S&P 500 index reached its highest level since April 2022, while the value of the dollar and Treasury yields slipped.

At the New York Stock Exchange (NYSE) that day, the Dow Jones Industrial Average closed at 34,347.43, up 86.01 points (0.25%) from the previous session. The large-cap focused S&P 500 index rose 32.90 points (0.74%) to 4,472.16, and the tech-heavy Nasdaq index gained 158.26 points (1.15%) to close at 13,918.96.

In the S&P 500, nine sectors excluding healthcare and industrials all rose together. Interest rate-sensitive sectors such as technology, communication, materials, and utilities increased by more than 1%. Leading tech stocks like Microsoft, Google Alphabet, and Tesla also surged. Nvidia rose 3.53% after announcing a $50 million investment agreement with Recursion Pharmaceuticals. Citigroup and Wells Fargo, which are set to report earnings this week, rose 1.83% and 1.22%, respectively.

Domino's Pizza soared more than 11% following news of a contract with Uber. Under this partnership, customers in the U.S., U.K., Canada, and other countries will be able to order Domino's Pizza products through Uber Eats. Beyond Meat rose over 13% after announcing an expansion to sell its products in 14,000 stores nationwide, including Whole Foods. On the other hand, Lucid fell nearly 12% as its Q2 vehicle deliveries fell short of expectations amid demand concerns.

[Image source=Reuters Yonhap News]

Investors immediately welcomed the June CPI report released that morning, which showed the smallest increase in over two years and a slower pace than expected. According to the U.S. Department of Labor, the June CPI rose 3.0% year-over-year, below Wall Street's forecast of 3.1%, marking the lowest since March 2021. After peaking at 9.1% in the same month last year, it dropped to 3% within a year. The June CPI also rose 0.2% month-over-month, below the expected 0.3%. The core CPI, excluding volatile energy and food prices, increased 4.8% year-over-year, the slowest pace since October 2021, and rose only 0.2% month-over-month. Both figures were below market expectations of 5.0% and 0.3%, respectively.

This is seen as a signal that the Fed's cumulative tightening is taking effect. Particularly on Wall Street, there is significance placed on the core CPI finally dropping into the 4% range, which had fueled concerns about prolonged tightening. The New York Times (NYT) reported, "The slowdown in core CPI, closely watched by the Fed, is noteworthy," calling it "good news for consumers and the Fed." George Mateyo, Chief Investment Officer (CIO) at Key Private Bank, said, "We have finally confirmed that inflation is cooling. The Fed will take this report as evidence that its tightening policies are having the desired effect."

However, a rate hike is still likely at the July FOMC meeting scheduled for the 25th-26th. Mateyo CIO welcomed the June CPI report as "significant progress" but assessed, "It does not seem likely to prevent the Fed from raising rates at the end of this month." Accordingly, investors are focusing on the Fed's moves after the July rate decision. Previously, the Fed hinted at two rate hikes this year through an upward revision of the June dot plot, with four remaining meetings including this month, September, November, and December. Ryan Sweet, Senior Economist at Oxford Economics, said, "The new data (June CPI) gives the Fed reason to discuss whether additional rate hikes are needed after this month," and predicted, "The Fed's tightening cycle will end."

In the market, the consensus is for a rate hike in July followed by a pause in September. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds (FF) futures market was pricing in about a 95% chance of a baby step hike in July that morning. The probability of a pause in September rose to the 82% range, up from the 70% range the previous day. The chance of an additional baby step in September was only in the 13% range. The Wall Street Journal (WSJ) reported, "The rate futures market is also betting that the July hike could be the last."

However, there are also many voices cautioning that one CPI report alone cannot confirm a downward trend in core inflation. Megan Horman, CIO at Bedens Capital, told CNBC, "Inflation is moving in the direction the Fed wants," but pointed out, "The three areas of inflation the Fed is closely monitoring?services, wages, and housing?are easing but still uncomfortably high."

The Fed's Beige Book economic report released that afternoon included information that inflation rose at a moderate pace but the rate of increase slowed in several regions. In some areas, consumers have become more price-sensitive, leading to reluctance to accept price hikes. However, the report also noted a still-strong labor market and ongoing wage increases. The Beige Book stated, "Overall economic activity increased slightly since late May," and "slow economic growth is expected over the coming months." The Producer Price Index (PPI), a wholesale price gauge, for June will be released the following day.

Fed officials made cautious remarks ahead of the blackout period before the FOMC meeting, during which public comments are restricted. Thomas Barkin, President of the Richmond Federal Reserve Bank, said at an event that "inflation is still too high" and warned, "If we retreat too quickly, inflation will strengthen again, and the Fed will have more work to do." Neel Kashkari, President of the Minneapolis Fed, also mentioned in a blog post that "if inflation becomes more entrenched than expected, rates could rise further." He added that while the U.S. banking system is generally sound, bank stress could reoccur at any time, and preparations for such scenarios are necessary.

Following the lower-than-expected CPI, Treasury yields fell in the New York bond market that day. The yield on the 10-year U.S. Treasury note hovered around 3.86%. The 2-year Treasury yield, sensitive to monetary policy, dropped to around 4.74%.

The value of the dollar also fell sharply. The Dollar Index, which measures the dollar's value against six major currencies, declined more than 1% to around 100.5.

International oil prices rose on the weaker dollar. On the New York Mercantile Exchange, the August delivery West Texas Intermediate (WTI) crude oil price closed at $75.75 per barrel, up 92 cents (1.23%). This closing price was the highest since April 28.

This content was produced with the assistance of AI translation services.