In a significant development, stock markets surged Wednesday after data showed that US inflation had slowed in May, raising hopes that the Federal Reserve will cut interest rates later this year.
The European markets also 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 made the greenback less attractive.
The annual consumer price index (CPI) in the US came in at 3.3 percent in May, down 0.1 percentage point from April, the Labor Department said. This has increased expectations of a Fed rate cut in the second half of 2024.
“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 regarding rate cuts?”
The Fed is widely expected to keep rates unchanged at the end of a regular monetary policy meeting later on Wednesday. Still, markets are keenly awaiting its “dot plot” guidance, which shows its outlook for rates this year. Investors will also closely watch Fed chief Jerome Powell’s press conference for signals about the central bank’s plans.
With inflation slowing and other recent data showing signs of the US economy cooling, the market is pricing in two rate cuts by the end of the year, Kenwell said. However, the strong job growth and the resilient economy have also complicated the outlook.
“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, the Fed will be dovish later this evening when they announce their latest policy report.”
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 the recent EU Parliament elections.
Overall, the slowdown in US inflation has fueled optimism among investors, who are now eagerly awaiting the Fed’s response and the implications for the broader economy.
