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Stocks were up solidly yesterday. Except for the Dow, which eked out a tiny loss. But the S&P and Nasdaq both made new all-time highs once again. And the small-cap Russell 2000, and mid-cap S&P 400 joined the party as well, gaining 1.62% and 1.34%
Kevin Matras   
Profit from the Pros
By Kevin Matras
Executive Vice President
Zacks Investment Research

S&P And Nasdaq Close At Record Highs On Better Than Expected CPI Inflation, Focus Shifts To PPI Inflation This Morning

Stocks were up solidly yesterday. Except for the Dow, which eked out a tiny loss. But the S&P and Nasdaq both made new all-time highs once again. And the small-cap Russell 2000, and mid-cap S&P 400 joined the party as well, gaining 1.62% and 1.34% respectively.

The markets breathed a sigh of relief after a better than expected Consumer Price Index (CPI) inflation report yesterday morning.

Yesterday's headline CPI came in at 0.0% m/m vs. last month's 0.3% and views for 0.1%. On a y/y basis it was up 3.3% vs. last month's 3.4% and estimates for the same. The core rate (ex-food & energy) was up 0.2% m/m vs. last month's 0.3% pace and the consensus for 0.3%. On a y/y basis it was up 3.4% vs. last month's 3.6% and expectations for 3.5%.

The cooler than expected readings immediately sent stocks soaring in pre-market trading. And they opened just as strong.

They remained strong ahead of the FOMC Announcement. And added to their gains during the Fed Chair Press Conference by Jerome Powell.

They did come off their highs by the close, but still finished strong.

All in all, the Fed left rates unchanged, as had been expected. And they appeared to trim their rate cut forecast down to just 1 cut this year vs. their previous forecast suggesting as many as 3 (presumably by 25 basis points each). The Fed Funds midpoint is currently at 5.38%. The Fed's new median expectation is for the benchmark to finish the year at 5.1%, which implies 1 cut.

The move wasn't entirely unexpected. One look at the calendar would tell you that. For one, they had already been saying they were going to keep rates higher for longer, given that progress on inflation had recently stalled. And the consensus was that they weren't going to begin until September at the earliest, or more likely November. If November, that would leave only one more Fed meeting after that in December.

So the math was already suggesting that 3-count was going to be trimmed to 2 or even 1. And we found out yesterday, it's likely to be 1. But that's still better than 0 (zero) considering there were plenty believing that we would get no rate cuts by year's end.

But in the grand scheme of things, the economy is doing just fine without rate cuts, and so is the market.

Nobody wants to see the Fed get behind the curve on this. But given the resilience of the economy, a strong labor market, corporate sales and earnings estimates trending up, and household incomes near record highs, there's no urgency for rate cuts at this very moment. That could change. But it hasn't yet.

We'll get another look at inflation today with the Producer Price Index (PPI). Yesterday's CPI looked at retail inflation. Today's PPI looks at wholesale inflation. The consensus is calling for headline inflation to be up 0.1% m/m vs. last month's 0.5%. On a y/y basis it's expected to come in at 2.5% vs. last month's 2.2%. The core rate is expected to come in at 0.3% m/m, while the y/y rate is expected to come in at 2.4%, in line with last month.

The PPI comes out at 8:30 AM ET.

The S&P and Nasdaq have each made new all-time high closes every day this week.

And we'll see if they can do it again today.

See you tomorrow,

Kevin Matras

Executive Vice President, Zacks Investment Research


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