Stock markets jump as US inflation cools, Fed Reserve likely to scale back plans for rate cuts

Wall Street’s tech-heavy Nasdaq and broad-based S&P 500 extended gains in afternoon deals rallied to fresh records the previous day.

European markets closed sharply higher after falling earlier this week in the wake of the far-right’s strong performance in the elections to the EU Parliament.

The dollar fell against other major currencies as lower rates make the greenback less attractive.

The Fed is widely expected to keep rates unchanged at the end of a regular monetary policy meeting later Wednesday, but markets are keenly awaiting its “dot plot” guidance, which shows its outlook for rates this year.

The spotlight will also be on Fed chief Jerome Powell as investors listen for any other signals about the central bank’s plans during his press conference following the meeting.

The drop in consumer inflation was welcomed by traders who have worried that the Fed may introduce fewer rate cuts — or none at all — than previously thought this year.

“The cool inflation numbers should boost investor confidence for a Fed rate cut in the second half of 2024,” said Bret Kenwell, US investment analyst at trading platform eToro.

“But will the Fed throw gasoline or cold water on the fire when it comes to rate cuts?”

The annual consumer price index (CPI) came in at 3.3 percent in May, down 0.1 percentage point from April, the Labor Department said.

With inflation slowing and other recent data showing signs the US economy is cooling, the market is pricing in two rates cuts by the end of the year, Kenwell said.

Forecasts for the number of reductions the Fed will make in 2024 have been whittled down from six at the start of the year following a string of figures indicating the US labour market remains solid and the economy remains resilient.

“This confuses the outlook for the US economy: jobs growth is strong, yet inflation is moderating,” said Kathleen Brooks, research director at trading platform XTB.

“What should the Fed do in this situation? If the market reaction is anything to go by, then the Fed will be dovish later on this evening when they announce their latest policy report.”

The US inflation figure was “also giving European stocks a chance to recover”, she added.

She said the markets were also “calmed” by a commitment by French President Emmanuel Macron that he would not resign on the outcome of snap legislative polls, which he called after his centrist party lost to the far right in weekend EU Parliament elections.

– Key figures around 1540 GMT –

New York – Dow Jones: UP 0.2 percent at 38,838.69 points

New York – S&P 500: UP 1.1 percent at 5,436.12

New York – Nasdaq: UP 1.9 percent at 17,666.38

London – FTSE 100: UP 0.8 percent at 8,215.48 (close)

Paris – CAC 40: UP 1.0 percent at 7,864.70 (close)

Frankfurt – DAX: UP 1.4 percent at 18,630.86 (close)

EURO STOXX 50: UP 1.4 percent at 5,034.43 (close)

Tokyo – Nikkei 225: DOWN 0.7 percent at 38,876.71 (close)

Hong Kong – Hang Seng Index: DOWN 1.3 percent at 17,937.84 (close)

Shanghai – Composite: UP 0.3 percent at 3,037.47 (close)

Euro/dollar: UP at $1.0851 from $1.0743 on Tuesday

Euro/pound: UP at 84.49 pence from 84.31 pence

Pound/dollar: UP at $1.2842 from $1.2739

Dollar/yen: DOWN at 155.81 yen from 157.11 yen

Brent North Sea Crude: UP 0.4 percent at $82.22 per barrel

West Texas Intermediate: UP 0.2 percent at $78.09 per barrel