Closing Stock Market SummaryToday's trade was decidedly upbeat. The major indices all closed near their best levels of the day, paced by the Russell 2000 (+1.2%). There were a few positive catalysts supporting the upside bias, but this morning's pleasing CPI report was the biggest driving factor.
Briefly, total CPI was up 4.0% year-over-year, versus 4.9% in April, marking the smallest change since the 12 months ending March 2021. Core-CPI rose 5.3% year-over-year, versus 5.5% in April, with the shelter index (+8.0%) accounting for over 60% of the total increase.
That report seemed to corroborate that market's view that the Fed will not raise rates tomorrow and diluted expectations of a rate hike in July. Presently, the fed funds futures market is pricing in a 5.8% probability of a rate hike tomorrow (versus 18.5% just before the CPI report) and a 64.2% probability of a rate hike in July (versus 71.0% just before the CPI report).
The price action today was indicative of a belief that the Fed may not overtighten after all and force a worse economic outcome than necessary to bring inflation back down to its 2.0% target. That belief led to a more pro-cyclical trade in today's session and led to the outperformance of the Russell 2000, which is comprised of mostly smaller, domestically-oriented companies. Additionally, value stocks outpaced growth stocks in today's session.
The cyclical S&P 500 materials (+2.3%) and industrials (+1.2%) sectors saw the biggest gains today. The consumer discretionary sector (+1.0%) and information technology sector (+0.7%), which was boosted by Oracle (ORCL 116.68, +0.25, +0.2%) after its earnings report, were also top performers today. The countercyclical utilities sector (-0.1%), meanwhile, was the lone laggard to close with a loss.
Apple (AAPL 183.31, -0.48, -0.3%) went against the grain today after it was downgraded to Neutral from Buy at UBS. The broader market exhibited decent strength, though. The market-cap weighted S&P 500 rose 0.7% while the Invesco S&P 500 Equal Weight ETF (RSP) rose 1.0%.
Market rates declined immediately after the CPI report, but Treasuries ultimately settled the session with losses across the curve despite a strong 30-yr bond auction in the afternoon. The 2-yr note yield rose 11 basis points to 4.70% and the 10-yr note yield rose seven basis points to 3.84%.
- Nasdaq Composite: +29.7% YTD
- S&P 500: +13.8% YTD
- Russell 2000: +7.7% YTD
- S&P Midcap 400: +6.3% YTD
- Dow Jones Industrial Average: +4.0% YTD
Reviewing today's economic data:
- The May NFIB Small Business Optimism Survey rose to 89.4 from 89.0 in April
- Total CPI was up 0.1% month-over-month in May (consensus +0.2%). Core CPI, which excludes food and energy, increased 0.4% month-over-month, as expected, driven by a 0.6% increase in the shelter index and a 4.4% increase in the index for used cars and trucks.
- On a year-over-year basis, total CPI is up 4.0%, versus 4.9% in April, marking the smallest change since the 12 months ending March 2021. Core CPI rose 5.3% year-over-year, versus 5.5% in April, with the shelter index (+8.0%) accounting for over 60% of the total increase.
- The key takeaway from the report is that inflation rates are moving in the right direction, although core inflation in particular will still be viewed by the Fed as "too high," which is why the prospect of another rate hike in July will be kept alive.
Looking ahead to Wednesday, market participants will receive the following economic data:
- 7:00 ET: Weekly MBA Mortgage Index (prior -1.4%)
- 8:30 ET: May PPI ( consensus -0.1%; prior 0.2%) and Core PPI (consensus 0.2%; prior 0.2%)
- 10:30 ET: Weekly crude oil inventories (prior -0.451 mln)
- 14:00 ET: June FOMC Rate Decision ( consensus 5.00-5.25%; prior 5.00-5.25%)