Stocks Surge to Record Highs as Inflation Data Points to Interest Rate Cuts Ahead

Stocks concluded last week on a high note, with the Nasdaq Composite rising over 3% and the S&P 500 popping nearly 1.5%. The S&P 500 closed above 5,400 for the first time ever, while both the Nasdaq and S&P 500 achieved record highs for four consecutive days. However, the Dow Jones Industrial Average slid more than 0.7%.

Investor optimism was fueled by softer-than-expected inflation data, which raised expectations for interest rate cuts. The May Consumer Price Index (CPI) showed that “core” CPI, excluding food and energy categories, increased by 0.2%, the lowest reading since June 2023. Additionally, the “core” Producer Price Index (PPI) remained unchanged in May, below economists’ expectations.

Economists believe these data points indicate a positive reading for the Fed’s preferred inflation gauge within the Personal Consumption Expenditures (PCE) index later this month. Bank of America’s US economist Stephen Juneau stated that the recent inflation data supports the view that disinflation is likely, leading to the possibility of rate cuts later this year.

Despite the positive outlook on inflation, concerns remain about the Fed’s current interest rate policy. Some economists fear that the central bank may be too restrictive, especially as signs of economic softening, such as an increase in the unemployment rate, emerge. The upcoming weekly jobless claims release will be closely watched for further insights into the labor market.

Looking ahead, the economic calendar for the week includes the May retail sales report, updates on manufacturing and services sectors, and weekly jobless claims. Markets will be closed on Wednesday for the Juneteenth holiday.

In conclusion, the latest inflation data has provided a tailwind for the stock market rally, with investors digesting the possibility of interest rate cuts. While the Fed’s current stance remains cautious, a growing number of economists are calling for a shift in policy to address potential economic challenges. The retail sales report for May will offer further insights into consumer spending amid higher rates, setting the tone for market sentiment in the coming weeks.