Worldwide stock markets climbed while the U.S. dollar retreated on Tuesday, driven by recent U.S. inflation data which highlighted a less-than-anticipated increase in consumer prices for May. This has potentially provided the Federal Reserve with the latitude needed to delay its tightening cycle.
The global stock market barometer, MSCI's all-country world index, edged up 0.4% following the announcement from the U.S. Bureau of Labor Statistics that the Consumer Price Index (CPI) for May increased 4%, a decrease from April's 4.9% and falling short of Reuters poll predictions of 4.1%.
In the wake of this data, market sentiment shifted dramatically towards the expectation that the Federal Reserve would maintain the status quo on interest rates following its two-day policy assembly on Wednesday, with likelihood jumping from around 75% pre-data to roughly 95%.
This revelation sparked an uptick in Wall Street futures, which had previously been on a stable track before the inflation figures were made public.
Following Monday's rally that saw the S&P 500 and the Nasdaq reach their loftiest closing levels since April 2022, market optimism continued to surge.
According to Peter Cardillo, Chief Market Analyst at Spartan Capital Securities, the stock market is rallying due to the likelihood of the Fed maintaining rates. "This points towards a pause in rate hikes this month, while not ruling out the possibility of rate increases in July," stated Cardillo. He highlighted that, while positive, any future actions will still depend on data trends.
The S&P 500 has seen over a 20% rise from its October 2022 low, fueled by significant gains in market heavyweights such as Amazon, Apple, and Tesla.
The core CPI, which excludes volatile items, witnessed a 0.4% monthly rise, bringing the annual rate to 5.3%. This matched market expectations and showed a decrease from the previous month's 5.5%.
Meanwhile, a surge in UK wage growth coupled with unemployment figures has stirred the Bank of England's worries over inflation levels, currently sitting at over quadruple its 2% target. As a result, traders now predict UK rates to peak around 5.7% by year-end, up from a predicted 4.85% a month ago.
Anticipation surrounds the European Central Bank, which is expected to raise rates by 25 basis points on Thursday, signaling a potential tightening of policy. Conversely, the Bank of Japan is projected to maintain its lenient policy stance following its Friday meeting.
