Opening Market Update

Headline CPI was flat for the first time since July 2022, and headline and core CPI were below expectations. Core's rise was the least in seven months. Yields plunged on the data.

Published as of: June 12, 2024, 9:20 a.m. ET

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(Wednesday market open) A slowing trend in U.S. inflation continued in May as the headline Consumer Price Index (CPI) stayed flat month over month and core CPI rose just 0.2%, the government said Wednesday. Both figures eased from April's growth and came in below market expectations, giving major indexes an early lift and sending Treasury yields plunging.

On an annual basis, CPI rose 3.3% and core CPI rose 3.4%, both slight improvements from April and just below analysts' consensus views. From a monthly standpoint, the rise in core CPI was the lowest increase in seven months. The headline month-over-month reading was flat for the first time since July 2022.

Analysts had expected monthly CPI to rise 0.1% and monthly core CPI growth of 0.3%, according to Trading Economics. Core strips out volatile food and energy prices. Expectations for annual CPI were 3.4% for headline and 3.5% for core.

"The CPI report was a net positive for the bulls with essentially all of the figures 0.1% below estimates, showing continued progress of the Fed's fight against inflation," said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.

The tame report's impact showed up immediately in the Treasury market, where yields on the 10-year Treasury note initially dropped 12 basis points to below 4.28%, the lowest since early April, before clawing back to 4.3%. From a Wall Street view, falling yields typically support so-called "growth stocks" like tech and consumer discretionary as well as small caps. Mega caps mostly climbed following the data.

Data and earnings roll along today as investors brace for the Federal Open Market Committee (FOMC) rate decision and projections and earnings from semiconductor giant Broadcom (AVGO).

The FOMC is widely expected to leave rate policy alone when it announces its decision at 2 p.m. ET, but will deliver updated projections on the future rate path. The so-called "dot plot" of FOMC expectations for the interest rate path is likely to shift downward to one or two this year from around three in the March dot plot.

Chances of a 25-basis point Fed rate cut by September rose to 70% this morning from around 50% a day ago, according to the CME FedWatch Tool, supported by CPI.

Futures based on the S&P 500® index (SPX) rose 0.7% shortly before the close of overnight trading, while Nasdaq-100® (NDX) futures climbed 0.9%. Futures based on the Dow Jones Industrial Average® ($DJI) rose 0.7%.

Read all our market commentary on our Insights & Education page, and you can follow us at @SchwabResearch.  

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Morning rush

  • The 10-year U.S. Treasury yield (TNX) fell 10 basis points to 4.3% after the CPI data.
  • The U.S. Dollar Index ($DXY) dropped sharply to 104.52.
  • The Cboe Volatility Index® (VIX) slipped to 12.4.
  • WTI Crude Oil (/CL) rose 1.3% to $78.91 per barrel.
  • Bitcoin (BTC) climbed 3% to $69,348.

Just in

Under the hood of CPI: The flat headline CPI reflected falling gasoline prices in May, the government said. Those aren't tracked by the core CPI, which saw increased monthly prices for shelter, medical care, used cars and trucks, and education. Prices fell for airline fares, new vehicles, communication, recreation, and apparel.

The core year-over-year CPI rise was the smallest since April 2021.

"While it's nice to see the disinflationary trends continue, we still will likely need to see consistent evidence that the disinflationary trends are on track towards the Fed's objective before putting a rate cut on the table," Schwab's Peterson said. "Both the inflationary and economic data have demonstrated resiliency this year and the Fed wants consistency, a firm trend before declaring victory."

Housing bump: In other data early today, weekly mortgage applications tracked by the MBA Mortgage Applications Index jumped 15.6% after falling more than 5% the prior week. A slight dip in mortgage rates appeared to draw a surge in demand.

Also, the American Petroleum Institute (API) reported that U.S. crude inventories fell 2.428 million barrels last week and U.S. gasoline inventories fell 2.549 million barrels. Additionally, the International Energy Agency (IEA) raised its forecast for global oil demand growth to 1.1 million barrels per day from 900,000. Over the long haul, however, the IEA expects a supply glut to develop by the end of the decade.

Even as the Federal Reserve gathered Tuesday, events in the Treasury world caught investors' attention. Notably, a U.S. 10-year Treasury note auction yesterday showed demand for U.S. bonds remains strong, Trading Economics reported. This could reflect investors expecting yields to fall and trying to get in at current levels.

What to watch

FOMC next: Investors will watch the dot plot for any signs of policy makers leaning toward zero to one cut this year versus one to two, which is now the market's forecast. A dot plot that's more hawkish might disappoint bulls, but keep in mind the market has been quite resilient this year despite expectations falling to one to two cuts from initial ideas of six to seven.

The decision and projections precede Fed Chairman Jerome Powell's press conference. He sounded more hawkish last month than in a while, saying that restrictive policy must be allowed to do its work (see more below). Powell's words often cause volatility, so anyone trading as he speaks should consider extra caution.

PPI ahead: With CPI done, attention turns to tomorrow's Producer Price Index (PPI) data for May, due at 8:30 a.m. ET.

Here is consensus for PPI, according to Trading Economics:

  • May PPI: 0.1%, versus 0.5% in April.
  • May Core PPI: 0.3%, versus 0.5% in April.
  • May annual PPI: 2.5%, versus 2.2% in April.
  • May annual core PPI: 2.4%, versus 2.4% in April.

Generally, PPI, or wholesale prices, has eased more quickly than CPI despite an uptick in April's monthly readings. Sometimes falling PPI ends up being reflected over time in CPI as wholesalers face less price pressure and see less need to raise prices.

Stocks in spotlight

Oracle gets AI lift: It's not often you see shares of a big tech firm jump 9% when the company misses Wall Street's earnings and revenue expectations, but that's what happened late yesterday with Oracle's (ORCL) stock.

Oracle's announcement that it had signed a contract with OpenAI to train ChatGPT in the Oracle Cloud seemed to save the day after Oracle's fiscal fourth-quarter revenue fell short of the FactSet consensus. The company also announced a partnership that gives customers the choice to combine Oracle Cloud Infrastructure and Google Cloud technologies. Investors appear to welcome signs of industry cooperation that could smooth the flow of data and provide customers more flexibility.

Broadcom earnings are due shortly after the close today and could provide investors insight into the chip sector. Broadcom has climbed about 29% this year to new highs despite disappointing many investors after not boosting its full-year guidance in its previous quarterly report. Any guidance updates will likely be of keen interest, considering the huge footprint Broadcom has across the semiconductor industry.

Split decision? Listen when Broadcom reports for any talk of possible stock splits following the recent split by Nvidia (NVDA). Broadcom recently traded above $1,460, nearly three times its price in late 2022. Very few tech stocks trade over $1,000.


Apple's conference continues today after shares enjoyed their best day of the year Tuesday with a gain of more than 7%. That followed a lethargic stock market response to the first day of the conference Monday and might reflect analyst notes published before Tuesday's session. Though some analysts expressed doubt that AI could move the needle much for Apple, others suggested it's a big opportunity to work AI into functions like photos and Siri and to recharge iPhone demand.

Stocks on the move:

  • Ciena (CIEN) rose 2.5% in premarket trading following an upgrade from Morgan Stanley for the networking systems and software company. The company's fiscal 2024 setup is now "more achievable," with upside potential in fiscal 2025, the analyst said.
  • Rentokil (RTO) jumped more than 12% ahead of the open following media reports that activist investor Nelson Peltz's Trian Partners has taken a stake in the pest control company.

Tuesday in review: Strength in the major indexes disguised weakness below the surface yesterday. Only info tech and communication services rose as all other sectors finished in the red and small-cap stocks also fell. Apple's 7% gains figured prominently into the tech sector gains. Financials had the worst day, falling more than 1% amid weakness in JPMorgan Chase (JPM) and American Express (AXP). Regional banks also struggled.

Mid-year update: The U.S. economy and stock market continue to demonstrate a severe bifurcation between the "haves" and the "have nots," according to Schwab's Chief Investment Strategist Liz Ann Sonders and Kevin Gordon, director, senior investment strategist. Read their Mid-Year Outlook for an assessment of how the first half unfolded and expectations for the second half of 2024.

Thinking cap

Ideas to mull as you trade or invest

Yield watch: The reliance on short-term rate policy dictating the market's path has unraveled, and the market has managed to rally so long as the benchmark 10-year Treasury note yield stays in the 4.3% to 4.5% range. The April sell-off occurred when the 10-year made a sudden upward move to the 4.6% to 4.7% range, and that remains where equity market weakness could develop. Another threat to the resilience is the current high price-to earnings (P/E) multiple of the SPX. "With SPX forward P/E of 21, I would think we need rates to come down more in order to justify a higher multiple, but of course, investor sentiment always has the potential to push valuation higher," said Schwab's Peterson.

Stocks, Yields Less Correlated: While investors keep a close eye on Treasury yields, the short-term interest rate outlook appears to play less of a role these days in setting market direction. The rolling 120-day correlation between the S&P 500 and the 10-year Treasury note yield fell into the red this year after spending most of the era from the late 1990s to the early stages of the pandemic in the green. "We now appear to be in an inverse relationship era that is starting to mirror the start to what we've been terming the 'Temperamental Era' from the mid-1960s to the mid-1990s," said Schwab's Sonders and Gordon in their Mid-Year Outlook. "That was an era marked by greater inflation volatility and a generally negative correlation between bond yields and stock prices. At least for the remainder of this year, we expect this correlation to remain negative."

Powell talk: Today's post-FOMC press conference from Fed Chairman Powell, could give investors more insight than usual into Powell's view of recent economic developments. That's because he'll speak just hours after the May CPI data release and will likely be asked to address the numbers. Powell's last public reflection on inflation came in mid-May when he spoke on a panel and said that price growth since the start of the year had been higher than expected. "We did not expect this to be a smooth road, but these (data) were higher than I think anybody expected," Powell said then. "What that has told us is that we will need to be patient and let restrictive policy do its work." After he spoke, the FOMC's favored inflation indicator, Personal Consumption Expenditures (PCE) prices for April came in at relatively comfortable levels, but no single report is a trend. Something he'll likely remind investors of today.

Calendar

June 13: May Producer Price Index (PPI) and core PPI and expected earnings from Adobe (ADBE).

June 14: University of Michigan preliminary June Consumer Sentiment Index.

June 17: Expected earnings from Lennar (LEN).

June 18: May Retail Sales, May Industrial Production and Capacity Utilization, expected earnings from KB Home (KBH).

June 19: U.S. markets closed for observance of Juneteenth.