Tame Inflation Powers Market Rally

Stocks entered the week riding a three-week winning streak and market participants were looking for tame inflation numbers to keep the momentum going. The first reading came Monday from the New York Federal Reserve survey, which showed inflation expectations had ticked up to 3.3%, the highest level since November 2023. The five-year inflation expectation also moved higher.[1] Overall, the survey was seen as a slight negative for the financial markets, as the expectations far exceed the Federal Reserve’s 2% inflation target.

Thankfully, the latest reading on producer prices proved more market friendly. The producer price index (PPI) came in a little hot, with wholesale prices rising 0.5% in April.[2] But the announcement included a revision to the March reading that dropped March PPI to minus 0.1% from plus 0.2%. Year-over-year prices increased only 2.2%. The numbers pushed stock and bond prices higher Tuesday, with the NASDAQ setting a new closing record high. Bond yields ticked lower, with the 10-year Treasury yield dipping to its lowest level since early April.

The consumer price index (CPI) provided added support for market bulls. It climbed 0.3% in April, slightly below both the 0.4% forecast and the 0.4% CPI increase in March.[3] The annual increase of 3.4% remains well off the Fed’s target, but April’s numbers kept rate cuts on the table for later in the year and seemed to remove the risk of rate hikes. CME’s FedWatch Tool now shows a 65% chance of a Fed rate cut in September and a better than 50% chance of another cut in December.[4] All three major stock market averages closed on Wednesday at record levels. And markets eased into the weekend holding on to most of their gains, with the Dow Jones touching the 40,000 milestone for the first time on Thursday and closing above that level on Friday.

Last week also brought the return of meme stocks. Keith Gill, one of the original meme stock champions, posted on Reddit for the first time in three years and ignited another frenzy.[5] Both Gamestop and AMC soared, more than doubling on huge volume. The rallies stalled Friday, but we saw similar pull backs in 2021 only to see the stocks push even higher, before ultimately returning to a more normal trading pattern.

Looking ahead, all eyes will be on NVIDIA. The company will be reporting fiscal first quarter results on Wednesday afternoon. As usual, estimates are high, with earnings projected to surge more than 400% and revenue projected to grow more than 200%.[6] Anything less could knock NVIDIA back and push the broader market from its record highs. But for now, let’s enjoy the recent gains and hope the Dow can put 40,000 in the rear-view mirror.

[1] https://www.newyorkfed.org/microeconomics/sce#/

[2] https://www.cnbc.com/2024/05/14/ppi-report-wholesale-prices-rose-0point5percent-in-april-more-than-expected.html

[3] https://www.cnbc.com/2024/05/14/stock-market-today-live-updates.html

[4] https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html?redirect=/trading/interest-rates/countdown-to-fomc.html

[5] https://finance.yahoo.com/news/revival-meme-stock-frenzy-points-100024202.html

[6] https://finance.yahoo.com/news/analyst-projections-key-metrics-reveal-131510041.html#:~:text=Analysts%20on%20Wall%20Street%20project,the%20same%20quarter%20last%20year.