Record Highs on Wall Street Amid Inflation Slowdown: Market Optimism Sparks Rate Cut Speculation | Daily Market Analysis

Key events:

• Japan - GDP (QoQ) (Q1)
• USA - Initial Jobless Claims
• USA - Philadelphia Fed Manufacturing Index (May)

On Wednesday, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all reached new record highs, buoyed by a more significant-than-expected slowdown in consumer inflation, fueling optimism for potential rate adjustments and driving Treasury yields lower.

The Dow surged by 349 points, marking a 0.9% increase, while the S&P 500 climbed 1.2%, and the Nasdaq Composite saw a 1.4% uptick. Despite these gains, all three indices are poised to conclude the session at record levels.

April witnessed a deceleration in the overall consumer price index, with a growth rate of 0.3%, down from the previous month's 0.4% expansion, contrary to economists' projections of a 0.4% rise. This unexpected moderation instilled hopes that the trend towards lower inflation is resuming, bringing the annual figure to 3.4%, a slight dip from the previous 3.5% pace.

Meanwhile, the core CPI, excluding volatile food and energy prices, also increased by 0.3% compared to March figures, with the annual core CPI inflation rate easing to 3.6% from March's 3.8%.

This decline in consumer prices followed a recent report indicating higher-than-anticipated producer price inflation. Nevertheless, the swift reversal in sentiment, prompted by the milder consumer price report, assuaged fears of rapidly escalating inflation, fostering expectations of forthcoming rate adjustments among investors, as highlighted in a Wednesday note from Stifel.

According to the CME FedWatch Tool, traders now perceive a 50.5% likelihood of the US central bank commencing rate cuts by September.

In response to the news, Treasury yields saw a significant downturn, with the 10-year Treasury experiencing a 10-basis-point drop to 4.34%.

On the economic front, retail sales stagnated in April, failing to meet forecasts of a 0.4% increase, indicative of ongoing consumer challenges.

The broader market rally was led by prominent tech and chip stocks, including Apple, Google, META, and Nvidia, the latter buoyed by indications that demand for its current chips remains robust ahead of the impending release of its next-gen Blackwell GPUs.

Conversely, Boeing Co faced a 2% decline following allegations from the Department of Justice that the aircraft manufacturer breached a settlement agreement related to two fatal 737 Max crashes, a claim vehemently denied by Boeing, asserting compliance with the terms of the agreement.

During the early Asian session on Thursday, the USD/JPY pair is seen trimming losses near 154.45. The softer-than-expected US CPI inflation data has placed some downward pressure on the US Dollar. However, the pair has modestly recovered following the recent weaker-than-anticipated Japan's GDP figures for the first quarter of 2024.

According to data from the Cabinet Office released on Thursday, Japan's economy contracted in the initial three months of 2024. The preliminary Japanese GDP showed a 0.5% quarter-on-quarter shrinkage in Q1, compared to a 0.1% expansion in Q4 of 2023, falling short of expectations for a 0.4% contraction. Additionally, the Annualized GDP witnessed a 2.0% contraction, surpassing estimates for a 1.5% contraction and contrasting with the 0.4% expansion seen previously. Consequently, the Japanese Yen attracted some selling pressure following the disappointing GDP growth numbers.

The Australian Dollar saw its three-day winning streak come to an end after mixed Australian employment data was released on Thursday. Furthermore, Australia's 10-year government bond yield traded lower around 4.2% after the Wage Price Index (QoQ) for the first quarter showed a 0.8% increase, slightly below the anticipated 0.9% rise. These data points have fostered a dovish sentiment surrounding the Reserve Bank of Australia regarding monetary policy, weighing on the AUD/USD pair.

The Australian Dollar received a boost during early trading hours on Thursday due to improved risk appetite following lower-than-expected monthly Consumer Price Index and Retail Sales data in the United States released on Wednesday.

Meanwhile, the NZD/USD pair is gaining momentum around 0.6120 during the early trading hours on Thursday. Market sentiment suggests that it is improbable for the Reserve Bank of New Zealand to cut its interest rate before the Federal Reserve, which bolsters the New Zealand Dollar and creates a favorable environment for the NZD/USD pair.

Analysts at Westpac anticipate that the RBNZ will maintain the Official Cash Rate (OCR) unchanged at 5.5% at its May meeting and remain comfortable with the forward outlook communicated in the February meeting.