S&P 500 and Nasdaq Reach 14-Month Highs on Modest Inflation Data, Fed Meeting in Focus | Daily Market Analysis

Key events:

• UK - GDP (MoM) (Apr)
• USA - PPI (MoM) (May)
• USA - Crude Oil Inventories
• USA - FOMC Economic Projections  
• USA - FOMC Statement   
• USA - Fed Interest Rate Decision
• USA - FOMC Press Conference

On Tuesday, the S&P 500 and Nasdaq achieved their highest closing points in 14 months. This surge was fueled by data indicating a modest increase in consumer prices in May, which raised expectations that the Federal Reserve would not raise interest rates during its meeting on Wednesday.

The consumer price index experienced a slight 0.1% rise in May, primarily due to lower energy prices and minimal food inflation. However, when excluding food and energy, the core CPI recorded a much stronger growth of 0.4%. The core index was supported by a significant increase in used auto prices and stable inflation in core services. Looking back over the past year, the headline CPI has risen by 4.0%, which, while still high, marks the lowest reading since March 2021. On the other hand, the core index has been slower to decrease and has risen by 5.3% over the past 12 months, with a 5.0% increase over the past three months (annualized).

The inflation data released yesterday indicated modest increases in significant categories, providing justification for the Federal Reserve to consider pausing at its meeting tomorrow. While the yearly rate of core inflation is expected to decrease further during the summer due to base effects, the continued robustness of the labor market implies that achieving a sustained 2.0% inflation rate may be challenging. Consequently, it is possible that the Fed may opt for two additional 25 basis points rate hikes in the third quarter.

Traders are anticipating a pause in the US Federal Reserve's interest rate hikes, causing the Dollar to weaken against other currencies. The conclusion of the Fed meeting tomorrow will be closely watched, with market participants also focusing on remarks from Fed Chair Jerome Powell, who may suggest the possibility of one more rate hike.

The British Pound (GBP/USD) performed exceptionally well, surging 0.8% to 1.2610 (compared to 1.2533 the day before) following impressive employment data from the UK. The Unemployment rate dropped to 3.8% from 3.9%, surpassing the forecasted 4%. Additionally, wages in Britain experienced significant growth, rising to 6.5% from a previously revised figure of 6.1%.

On the other hand, the US Dollar (USD/JPY) gained ground against the Japanese Yen, reaching 140.23 (compared to 139.42), primarily driven by higher US bond yields. The Greenback saw volatility in trading, hitting an overnight low at 138.95.

The benchmark US 10-year Treasury rate climbed by 9 basis points to 3.81%. In contrast, Japan's 10-year JGB yield remained unchanged at 0.41%.

Across the globe, treasury yields mostly increased. The UK 10-year Gilt yield rose by 10 basis points to 4.43%, while Germany's 10-year Bund rate reached 2.42% (compared to 2.38%). Japan's 10-year JGB rate remained flat at 0.41%.

As we approach today's significant event, which is the US Federal Reserve's decision, and with a busy data calendar ahead, it is likely that markets will enter a consolidation phase, albeit with choppy movements. Market participants are anticipating that the Federal Reserve will pause its interest rate hikes at the conclusion of their meeting. The key focus will be on the remarks made by Fed Chair Jerome Powell following the meeting. If Powell signals the possibility of one more rate hike in the future, we can expect the Dollar to bounce back from its current levels before further consolidation.

On Wednesday, gold prices remained relatively unchanged following three consecutive days of losses, as investors awaited further signals from the conclusion of the Federal Reserve meeting later in the day. Concurrently, global markets exhibited an increased risk appetite, prompted by China's decision to cut interest rates for the first time in 10 months, aimed at supporting a sluggish economic recovery.

However, the rise in risk appetite diminished the attractiveness of safe-haven assets like gold and the dollar. As a result, gold continued to trade within a narrow range, reflecting the impact of the increased risk appetite on the market.

Given the circumstances, volatility is expected to remain high throughout the rest of this week.