US Inflation Looking Weak
US Markets

Stocks Take A Breather on Low Inflation Readings

Core CPI in May also rose 0.1%, below the expected 0.2% survey estimate. The year over year change in CPI was 2%, which means inflation has slowed.

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Market Movers

  • Consumer Prices rose an in-line 0.1% in May
  • Core CPI rose 0.1%, less than the 0.2% expected
  • Year over Year inflation rose 2%, less than the 2.1% forecast
  • Today's CPI and Yesterday's CPI reading highlight the low inflation that may give room for the Fed to cut rates but also highlights the slowing growth in the U.S. 

Mike’s Commentary

Yesterday stocks lost ground after strong opening gains and closed slightly lower, down 1 S&P point.  The afternoon action suggested that equity shares had ground to a halt. Today we are seeing more of the same, with stocks giving up a small amount of ground, with the S&P shedding 8 points as we write and the Dow down 60.   

The CPI number this morning supported the idea of rate cuts but there may be some exhaustion in the rate cut narrative that’s fueled a week of gains.  The bearish case for stocks involves negative developments in trade and we are not out of the woods on that yet.

Today Consumer Prices for May rose 0.1%, in line with expectations. Core CPI in May also rose 0.1%, below the expected 0.2% survey estimate. The year over year change in CPI was 2%, which means inflation has slowed. Recall yesterday’s PPI was a bit softer than expected in May.  

This and other data helps the case for rate cuts. The Fed will have a harder time arguing that the weakness in inflation has to do with transitory factors or any one cause. The other side of the coin is that inflation must be slowing for a reason. One may be that economic growth here and elsewhere is declining. The environment of trade uncertainty does not help here. 

So, in a reverse of yesterday, Utilities, Staples and Real Estate stocks are leading (chart below).  Bonds are up today and the 10-year treasury bond yields have ticked back down to 2.12%.  Lucky the Fed has our backs says the market…

Sector Recap

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Brian’s Technical Take

Today’s core CPI data disappointed both MoM and YoY and is simply another data point affirming the decline in inflation. The next FOMC is one week from today and while there is only a 23% probability for a 25bps rate cut, the next meeting in July carries an 83% probability for one. So whether or not the Fed takes any action next week, there should certainly be plenty of commentary for pundits of all walks to parse through.    

The big uncertainty is the looming meeting between Presidents Trump and Xi at the upcoming G20. Some argue how can the Fed cut rates ahead of that if there is a chance for a trade truce.  However given the complexity of the process and the wide distance between the two sides, a concrete deal is unlikely.  And another trade truce might not be as well received as the prior given the increasing rhetoric and trump’s growing willingness to use tariffs for leverage not just in trade. 

The below chart graphs today's yield curve (yellow) and where it was at the end of May (dotted white). Despite the relief rally and risk on sentiment over the first two weeks in June, the entire curve aside from the 30-year yield has become even more inverted vs. the overnight rate which currently stands at 236bps.  The lower panel plots the net change of the curve between the two time periods and shows how steep the short end has come in this month. 

Whether or not a trade truce of some sort happens by the end of June, the overnight FFR looks too high.  Why not just cut 25bps now and then reassess?  The next meeting won’t be for another six weeks.

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Nasdaq's Market Intelligence Desk (MID) Team includes:

Charles Brown is Associate Vice President on The Market Intelligence Desk with over 20 years of equity capital markets experience. Charlie has extensive knowledge of equity trading on both floor and screen based marketplaces. Charlie assists with the management of The Market Intelligence Desk and works with Nasdaq listed companies providing them with insightful objective trading analysis.

Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.

Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.

Brian Joyce, CMT is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Before joining Nasdaq Brian spent 16 years as an institutional trader executing equity and options orders for both the buy side and sell side. He also provided trading ideas and wrote technical analysis commentary for an institutional research offering. Brian focuses on helping Nasdaq’s Financial, Healthcare and Transportation companies, among others, understand the trading in their stock. Brian is a Chartered Market Technician (CMT).

Michael Sokoll, CFA is Associate Vice President on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information. 

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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