【Financial Analysis】Falling inflation stimulates the three major U.S. stock indexes to hit new highs, and the path of interest rate cuts is still divergent

Xinhua Finance and Economics, New York, May 15 (Reporter Liu Yanan) As the overall decline in the increase in the US consumer price index in April, the three major stock indexes of the New York stock market opened higher on the 15th, and the three major stock indexes closed at record highs.

Major stock indexes hit record highs as U.S. macro data showed a slowdown since May and prices continued to retreat after a first-quarter hiatus, suggesting that the April correction in U.S. equities has come to an end, and there is still some disagreement on when the Fed will start cutting interest rates.

As of the close of the day, the Dow Jones Industrial Average rose 349.89 points from the previous trading day to close at 39908.0 points, an increase of 0.88%; The S&P 500 stock index rose 61.47 points, or 1.17%, to close at 5308.15; The Nasdaq Composite Index rose 231.21 points, or 1.40%, to close at 16,742.39.

In terms of sectors, the 11 major sectors of the S&P 500 index rose and fell 10. The technology and real estate sectors led the gains with gains of 2.29% and 1.69%, respectively, while the consumer discretionary sector fell 0.00%.

Inflation has come down across the board

The broad pullback in the US consumer price index in April at least temporarily ended the hot streak in the first quarter, which means that inflation is still likely to continue to fall.

Data released by the U.S. Department of Labor in the morning of the same day showed that the U.S. consumer price index rose 0.3% month-on-month in April, in line with market expectations and lower than the 0.4% increase in March; The index rose 3.4% year-on-year in April, in line with market expectations and down from 3.5% in March. Excluding food and energy, the US core consumer price index rose 0.3% month-on-month in April, in line with market expectations and down from 0.4% in March. The core index rose 3.6% year-on-year in April, in line with market expectations but down from 3.8% in March.

Analysts at UBS Group's wealth management department said on the 15th that although the month-on-month increase in the U.S. consumer price index in April was only 0.1% lower than expected, this was the first time since October last year that the increase was lower than expected. The core consumer price index rose in April, while in line with market expectations, which was the lowest level this year, and after three consecutive months of higher than expected, the data was quite positive.

Economists at Bank of America's Global Research Department said on the same day that the U.S. inflation data released on the same day was positive and a step in the right direction after a series of higher than expected this year. Still, the monthly data is unlikely to inspire a lot of confidence and excitement at the Fed. Core goods prices continued to fall, while core services prices remained sticky.

Mark Hamrick, senior economic analyst at Bankrate, a U.S. consumer financial services company, said that the April data lacked unpleasant surprises compared to the disappointing move in the consumer price index in March. The US consumer price index rose by 3.4% year-on-year and the core consumer price index rose by 3.6% year-on-year, which remained uncomfortably high. The fight against inflation requires interest rates to remain high in the near term.

Paul Ashworth, chief U.S. economist at Capital Economics, said the U.S. core consumer price index rose even better than it looked in April. The Fed's more focused personal consumption expenditures price index is likely to show a 0.2% month-on-month increase in April.

The market reaction has been positive

Although investors had already given optimistic expectations for inflation data in the previous session and pushed US stocks higher, the positive news from the day's inflation data still significantly boosted market optimism, driving the three major stock indexes to new highs.

U.S. Treasury yields fell quickly after the inflation data, with the 10-year yield falling 9.8 basis points to close at 4.344%; The US 2-year Treasury yield fell by 7.9 basis points to close at 4.738%.

Brian Nick, a senior investment strategist at the Macro Institute, a service for financial practitioners, said the market really wanted to see weak inflation data and did get what it wanted. The latest data gives the Fed more reason to cut interest rates this year.

Nick believes that Nvidia and many growth companies will benefit from lower interest rates. In terms of individual stocks, the share price of chip manufacturing giant Nvidia rose significantly by 3.58% on the 15th.

Chris Zaccarelli, chief investment officer at the Alliance of Independent Advisors, said that while the slowdown in consumer spending could be a problem for the U.S. economy, the current data eases some of the pressure on the Fed.

Zaccari said he believes the market is still in a bull market and expects the positive inflation data to prevail over the negative retail sales data.

According to data released by the U.S. Department of Commerce in the morning of the same day, the retail sales of the U.S. retail and food services industry in April were $705.2 billion, flat from the previous month, and the market expectation was a 0.4% increase from the previous month, and the month-on-month increase in March data was revised from 0.7% to 0.6%.

Data released by the Federal Reserve Bank of New York in the morning of the same day showed that the manufacturing sentiment index in the bank's area was -15.6 in May, weaker than the market expectation of -10 and -14.3 in March.

UBS said the U.S. stock market reacted positively to inflation data on the day, with the S&P 500 reaching a record high. The rise in Treasury prices provided ammunition to bulls and supported higher equities. For now, it looks like investors' fears of a few weeks ago have mostly been erased. Investors are advised to continue investing in the stock market given healthy performance growth, strong AI investments, and potential interest rate cuts.

Brian Belski, chief investment strategist at Bank of Montreal Capital Markets in Toronto, raised the target point of the S&P 500 index to 5,600 points by the end of this year from the previous 5,100 points in a report released on the 15th. This target is the highest among major research institutions.

"What is clear is that we were underestimating the strength of the market momentum," Belski said. "I believe that the current performance of the stock market is similar to that of 2021-2023, when the strength of market momentum was not given sufficient attention. The current upward momentum in the market is likely to continue.

There is still disagreement over when the Fed will cut interest rates

While weaker data such as falling inflation and employment once again make it realistic for the Fed to cut interest rates as early as September, there is still some disagreement on when the Fed will start cutting interest rates because the market needs to watch further.

According to data released by the Chicago Mercantile Exchange FedWatch Tool at 4 pm on the 15th, the market believes that the probability that the Fed will cut interest rates by at least 25 basis points at the September interest rate meeting is 75.3%, significantly higher than the previous day's 65.1%.

All in all, the latest inflation data is in line with the Fed's rate cut in September, especially as retail sales data for April showed weakness, Ashworth said.

Skyler Weinand, chief investment officer at Reagan Capital, said that while the latest inflation data has given the Fed breathing room to cut interest rates as early as September this year, the Fed's monetary policy path has not yet been determined.

Weinand said there is still a long way to go to achieve the Fed's 2% inflation target, the U.S. economy remains strong, and it will take a few months of weak inflation data to give the Fed the green light to cut interest rates. The Fed is not out of the woods yet.

UBS believes that the latest U.S. consumer price index and producer price index mean that the U.S. core personal consumption expenditures price increase in April will be close to 0.24%, which will be the smallest increase this year, but it may still be a little too high to support the Fed to cut interest rates.

UBS said that overall, the inflation and retail sales data released on the same day supported the base case of a soft landing for the economy given by UBS's wealth management department, and the Fed is still expected to cut interest rates by two 25 basis points this year, with the first rate cut expected in September.

Bank of America Global Research said that the U.S. core personal consumption expenditures price index is expected to rise 0.23% month-on-month in April and 2.8% year-on-year, still above the Fed's 2% target. Therefore, the forecast of the Fed's first rate cut in December this year is still maintained. Market pricing suggests that the Fed is likely to start cutting rates in September and cut rates twice this year. For the Fed to actually cut rates in September, there needs to be more slowdown in inflation or weaker job market data.

Gargi Chaudhuri, head of investment strategy in the Americas at BlackRock iShares, said on the same day that although U.S. inflation in April was lower than expected, interest rates lasting longer are likely to be the monetary policy that the Fed needs to take.

Chowdhury said the new data reiterates that a more restrictive monetary policy stance is appropriate in the current macroeconomic environment to continue to pause interest rate hikes, while inflation is moving in the right direction.

Editor: Zhang Yao

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