The S&P 500 has increased four consecutive weeks, The Nasdaq Composite has increased seven consecutive weeks. Both made a claim yesterday on extending those weekly winning streaks. The S&P 500 gained 0.9% and broke out above 4,300 to log its best close since April 2022. The Nasdaq Composite, riding the continued strength of the mega-cap stocks, including Tesla (TSLA), which recorded its twelfth straight gain, jumped 1.5%.
There was some excitement and fear in the air. The excitement was over the possibility of the Fed skipping a rate hike this week, the economy potentially avoiding a hard landing, and the calm manner in which the Treasury market digested nearly $200 billion of new debt issuance. The fear was missing out on further gains.
That dual relationship is once again in play today following an encouraging earnings report and outlook from Oracle (ORCL), a reaffirmation of the FY23 outlook by Home Depot (HD), and a Consumer Price Index for May that went the market’s way in suggesting the Fed is likely to hold off on raising rates tomorrow.
Briefly, total CPI was up 0.1% month-over-month in May (Briefing.com consensus +0.2%). Core CPI, which excludes food and energy, increased 0.4% month-over-month, as expected, driven by a 0.6% increase in the shelter index and a 4.4% increase in the index for used cars and trucks.
On a year-over-year basis, total CPI is up 4.0%, versus 4.9% in April, marking the smallest change since the 12 months ending March 2021. Core CPI rose 5.3% year-over-year, versus 5.5% in April, with the shelter index (+8.0%) accounting for over 60% of the total increase.
The key takeaway from the report is that inflation rates are moving in the right direction, although core inflation in particular will still be viewed by the Fed as “too high,” which is why the prospect of another rate hike in July will be kept alive.
On a related note, the probability of a rate hike by the FOMC tomorrow plunged to 2.4% from 18.5% in the wake of this morning’s report, according to the CME FedWatch Tool, whereas the probability of a 25-basis points rate hike at the July meeting dipped only to 68.2% from 71.0%.
The 2-yr note yield is currently down nine basis points to 4.50% and the 10-yr note yield is down seven basis points to 3.70%. The dual message in those initial moves is that there is confidence the Fed will hold off on a rate hike and continued faith that inflation is going to continue to come down.
The equity futures market for its part looks to be following a similar line of thinking.
Currently, the S&P 500 futures are up 16 points and are trading 0.4% above fair value, the Nasdaq 100 futures are up 100 points and are trading 0.7% above fair value, and the Dow Jones Industrial Average futures are up 55 points and are trading 0.2% above fair value. Those indications are all improved from where they were shortly before the CPI release.
It will be particularly interesting to see where the market goes after the open, but if excitement and fear are still driving things, then it stands to reason that the prevailing trade (or the “pain trade” as some call it) will be higher.
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Originally Posted June 13, 2023 –Excitement and fear driving things
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