Another Record Close for S&P 500 and Nasdaq After the FOMC

Despite the Federal Reserve’s more hawkish stance, major US indexes like the S&P 500 and NASDAQ managed to finish at record highs today. Earlier concerns about a potential bearish reversal this week were somewhat mitigated by two key economic events: the Consumer Price Index (CPI) report and the Federal Open Market Committee (FOMC) meeting.

S&P 500 Chart Daily – Approaching the 5,000 Level

S&P 500 Daily Chart

The latest CPI data indicated a slowdown in inflation, which provided some support to stocks. Specifically, the CPI rose by 3.3% year-on-year in May, slightly below the expected 3.4% increase. The core CPI, which excludes volatile food and energy prices, also came in lower than expected at 3.4% compared to the anticipated 3.5% rise. This news caused a decline in the 10-year Treasury yield to 4.25%, marking its lowest level in over two months.

Nasdaq Daily Chart – Buyers Just Can’t Stop

By market close, the Dow Jones Industrial Average DOW dropped slightly by 25 points or 0.1%, closing at 38,710. In contrast, the S&P500 index gained approximately 1%, while the NASDAQ Composite rose by 1.4%, both ending the day on a bullish note and reaching new record highs. Below are the main remarks from Powell’s press conference.

FED Chair Jerome Powell Comments

US Labor Market:

  • Gradual Cooling: Powell notes that the labor market is gradually cooling and moving into a better balance.
  • Labor Gains: Acknowledges that labor gains may be overstated but emphasizes they remain strong.

FED Rate Cuts:

  • Timing Shift: Indicates that the rate cuts anticipated for this year are likely to occur next year instead.
  • Data-Dependent: Emphasizes the need to follow data to guide decision-making.

Inflation and Wages:

  • Positive Inflation Report: Describes the latest inflation report as better than expected and highlights the progress made on inflation.
  • Wage Growth: Notes that wages are still running on a sustainable path but are not the primary cause of inflation. However, wage moderation is needed to bring overall inflation back to the 2% target.
  • Market Rents: Warns that it may take several years for the effects of higher market rents to filter through.

Consumer Spending and Credit:

  • Credit Card Balances: Observes that credit card balances and defaults are increasing but are not yet at high levels.
  • Consumer Spending: Reports that consumer spending is still growing solidly.

Approach to Economic Management:

  • Proactive Stance: States that the Fed’s plan is to be proactive rather than reactive, implying a preference for preventative measures rather than corrective actions after problems arise.

Implications for Markets and Policy:

Market Reaction:

  • Positive Sentiment: Powell’s comments about the better-than-expected inflation report and gradual labor market cooling may bolster market sentiment.
  • Delayed Rate Cuts: The shift in the timeline for rate cuts to next year may influence market expectations and trading strategies.

Policy Direction:

  • Data-Driven Decisions: Powell’s emphasis on data dependency suggests that the Fed will closely monitor economic indicators before making further policy adjustments.
  • Inflation Management: The focus on wage growth and its impact on inflation highlights the Fed’s continued vigilance in managing inflationary pressures.

Investor Considerations:

  • Long-Term Inflation Outlook: Investors should note the prolonged timeline for market rents to impact inflation and plan accordingly.
  • Consumer Behavior: Solid consumer spending growth indicates a resilient economy, which may affect sectors reliant on consumer activity.
  • Credit Market: The rise in credit card balances and defaults could have implications for financial institutions and consumer credit markets.

The emphasis on gradual labor market cooling, better-than-expected inflation data, and a proactive approach to economic management suggests a cautious outlook, while market participants were expecting a stronger guidance towards the start of rate cuts. Powell totally avoided to commit to a September cut, so now we’re left with just one rate cut.

SP500 Live Chart

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Skerdian Meta
Lead Analyst
Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.
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