S&P 500, Nasdaq 100 Hit Record Highs As Benign Inflation Data Supports Fed Rate Cut Prospects (UPDATED)

Editor’s Note: Article has been updated with additional information.

A softer-than-expected April inflation report and cooler retail sales data sparked broad-based rallies in risky assets Wednesday, as traders grew more confident in the likelihood of Fed rate cuts this year.

Both the S&P 500 and the tech-heavy Nasdaq 100 indices opened the session at fresh record highs, completing their rebound after April’s temporary dip.

Chart of The Day: S&P 500, Nasdaq 100 Rise To All-Time Highs As Inflation Looks Less Scary

What Happened: The headline Consumer Price Index (CPI) inflation slowed from 3.5% to 3.4% year-over-year in April 2024, matching estimates. On a monthly basis, it decelerated from 0.4% to 0.3%.

When excluding energy and food items, core inflation cooled from 3.8% to 3.6% year-over-year, as expected, hitting the lowest level in three years.

Simultaneously, the April’s retail sales report indicated a flat monthly change, marking a sharp deceleration from the downwardly revised 0.6% surge in March, and notably below the expected 0.4%.

Why it matters: Before Wednesday’s data, traders had anticipated about 50 basis points of rate cuts in the fed funds rate by year-end.

The benign inflation report breaks a concerning three-month streak of higher-than-expected inflation readings and reignites hopes of a steady return to the Fed’s 2% target.

Traders are currently assigning a 73% chance of a first rate cut in September, up from the 62% one a day earlier, according to CME Group’s FedWatch Tool.

Overall money markets currently factor in 55 basis points of rate cuts in 2024, indicating increasing investor bets on a looser Fed policy going forward.

Market reactions: Rate-sensitive 2-year Treasury yields tumbled by 8 basis points to 4.73%, breaking below the crucial 200-day moving average.

The SPDR S&P 500 ETF Trust SPY was 0.5% higher at 09:35 a.m. in New York. The Invesco QQQ Trust QQQ also rose 0.5%.

Sector-wise, real estate stocks, as tracked by the Real Estate Select Sector SPDR Fund XLRE rallied 1.7%.

The Utilities Select Sector SPDR Fund XLU moved 1.1% higher.

Energy stocks, as tracked by the Energy Select Sector SPDR Fund XLE were the major laggards, down 1.4%.

Blue-chip stocks, as tracked by the SPDR Dow Jones Industrial Average ETF DIA, inched 0.3% higher.

Small caps outperformed larger cap stocks, with the iShares Russell 2000 ETF IWM up 1.2%, early April levels.

Bitcoin BTC/USD rallied over 4%.

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