Soft CPI Print Sends Stocks Higher Ahead of Fed

Soft CPI Print Sends Stocks Higher Ahead of Fed A 0.0% month-over-month reading for the May Consumer Price Index, below the 0.1% consensus estimate, sent the S&P 500 up 0.85% and the Nasdaq Composite 1.53% higher to new records. The cooler inflation data pushed the 10-year Treasury yield down as low as 4.25% before it settled around 4.32%, with markets immediately repricing for a greater chance of Federal Reserve rate cuts this year. ## Background Markets entered the session positioned cautiously after the May jobs report last week came in much stronger than anticipated, sending bond yields higher and paring bets on Fed easing. The tape showed a market bracing for another hot inflation number, which would have reinforced the central bank’s ‘higher for longer’ stance. The Consumer Price Index, or CPI, is a key inflation gauge that measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Today’s report was the last major data point before the Federal Reserve concludes its two-day policy meeting this afternoon. The committee will release a statement and an updated Summary of Economic Projections, which includes the so-called ‘dot plot’ of individual members’ interest rate forecasts. This serves as the Fed's primary guidance—its signal to markets about the likely future path of policy—which investors use to price assets. ## Why it matters The soft CPI print provides the Fed with evidence that inflation is resuming its downward trend, strengthening the case to begin cutting rates from their 23-year high. The market reaction was a classic risk-on rotation driven by interest rate expectations. The drop in Treasury yields provides mathematical relief to equity valuations, particularly for growth and technology stocks whose earnings are further in the future. This explains the Nasdaq’s outperformance relative to the Dow Jones Industrial Average, which finished down 0.09%. Traders who were short bonds heading into the report were on the wrong side of the move and forced to cover. ## What to watch The key observable is the median 2024 interest rate projection in the Fed’s dot plot, released at 2:00 PM ET. In March, the median forecast was for three 25-basis-point cuts this year. The market will be watching to see if policymakers reduce that number in response to the sticky inflation seen earlier in the year, or if today's softer print gives them confidence to stick closer to their original plan. Chairman Powell's subsequent press conference will be parsed for any shift in tone regarding the committee's confidence in the inflation outlook. The market's final verdict on the day will depend on whether the Fed's message validates or contradicts the optimism sparked by the morning's CPI data.