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Cool inflation data eases near-term Fed pressure
The Labor Department's Producer Price Index (PPI) report provided a second straight day of cooler-than-expected inflation data, even as newly confirmed U.S. Federal Reserve Chair Kevin Warsh appeared before the Senate Banking Committee in his second day of Congressional testimony.
Combined with Tuesday's CPI report, the PPI data suggests that inflation took a step in the right direction last month even though it remains elevated due to the U.S.-Israeli war on Iran. This eased near-term pressure on the central bank to raise its key interest rate.
"My fear going into this week was, we could get a hot CPI print, inflation above 3.8%, and we didn't get it; we got a cooler reading of 3.5%," said Lauren Cassidy, chief investment officer of Founders 100 ETF, in Dallas. "So that allows the Federal Reserve to have the opportunity to keep rates flat or cut them later this year, which is good news for the market."
Financial markets are currently pricing in a 10.2% likelihood that the Fed will implement a 25 basis point rate hike at the conclusion of this month's monetary policy meeting, down from 31.0% a week ago, according to CME's FedWatch tool.
Even so, this week's inflation data is focused on last month, as investors were growing optimistic that negotiators were moving toward a peaceful resolution to the Middle East conflict. That optimism has faded in recent days as the U.S. and Iran staged escalating airstrikes, vying for control over the Strait of Hormuz. That could result in renewed price pressures.
Fed Governor Lisa Cook said she is "prepared to act" if inflation does not soon begin to slow.
Wall Street ends higher on cooler inflation and earnings optimism
Wall Street stocks gained ground as softening inflation data and a robust beginning of second-quarter earnings season put investors in a buying mood.
All three major stock indexes closed modestly higher despite weakness in semiconductors, with consumer-focused retail .SPXRT and travel/leisure .SPCOMHOTL clear outperformers.
A second day of solid bank earnings added momentum to an auspicious beginning to second-quarter reporting season.
BlackRock BLK.N and Morgan Stanley MS.N both beat quarterly profit expectations.
"Everything looks great with the bank earnings," said Mike Dickson, head of portfolio management at Horizon Investments in Charlotte, North Carolina. "I would not be at all surprised to see another bang-out quarter."
Analysts currently expect second-quarter year-on-year S&P 500 earnings growth of 23.7%, according to the most recent data from LSEG.
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