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CPI Report; Stock, Bonds High This Week

It was a strong start to the week for investors as both stocks and bonds in the U.S. moved higher. As of Wednesday’s open, the S&P 500 was higher by nearly 1.4% mid-week, while the yield on the 10-year Treasury rallied nearly 15 bps, trading around 4.30% Wednesday. 

The big news so far this week came in the form of the Consumer Price Index (CPI) report on Wednesday before the open. The CPI was unchanged for the month of May, better than consensus estimates for a 0.1% monthly increase. Year over year, inflation rose 3.3% which also was below expectations. Core prices slowed as well, showing just a 0.2% increase for May without any help from the shelter component, which has risen 0.4% for each of the last four months. Over the past 12 months, core CPI rose 3.4%, below last month’s year-over-year reading of 3.6%. 

Importantly, this CPI report comes ahead of the highly anticipated Federal Reserve Policy decision on Wednesday afternoon. The markets are expecting the central bank to keep policy rates unchanged at 5.5% but will pay close attention to Fed Chair Jerome Powell’s news conference remarks as well as the updated Summary of Economic Projections. The projections will include forecasts for four key variables: Year-over-year real GDP growth, headline PCE inflation, core PCE inflation, and the unemployment rate. We expect to see plenty of volatility this week as the markets adjust their expectations for monetary policy going forward. Heading into the Fed’s announcement, the markets are currently anticipating about a 70% probability of a 25-bps rate cut in September, followed by a second cut in December. 

Source: GSAM, CNBC, JPMorgan 

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