The S&P 500 jumped to its highest level in 13 months on Monday as traders hoped the Federal Reserve will skip hiking rates when the central bank decides on policy Wednesday.
The S&P 500 added 0.93% to close at 4,338.93, with gains steadily increasing throughout the trading day. The benchmark surpassed its high from last August and reached the best intraday and closing levels since late-April 2022. The Nasdaq Composite popped 1.53% to finish the day at 13,461.92, also reaching its highest levels since April 2022. The Dow Jones Industrial Average climbed 189.55 points, or 0.56%, to close at 34,066.33.
Markets have come to expect that the Fed will skip a rate increase at this week’s meeting, with traders pricing in a roughly 72% chance that there will be no hike, according to the CME Group’s FedWatch tool. The Fed has hiked 10 consecutive times since starting this latest policy-tightening cycle in March 2022.
Tuesday’s inflation data could help reinforce the case that inflation is subsiding, as economists expect the consumer price index to show inflation dropping to a 4% annual rate in May. That’s down from 4.9% in the prior month.
The central bank will ultimately decide to skip a rate hike for June, according to Certuity co-chief investment officer Dylan Kremer, but the Fed likely isn’t done raising rates overall.
However, market expectations are that Fed officials will emphasize a commitment to keep inflation at bay and come back with a final rate increase at July’s meeting before going on hold for the rest of the year.
Nikkei leads on Fed bets
It was a mixed Tuesday morning session for the Asian markets. The Nikkei and the Hang Seng enjoyed a bullish morning while the ASX 200 struggled for direction. There were no US economic indicators from Monday to influence, while a bullish US session supported the broader Asian equity markets.
Investor bets on softer US inflation and a Fed pause this Wednesday drove demand for riskier assets. Economists forecast the US annual inflation rate to soften from 4.9% to 4.1%, supporting a Fed pause.
The probability of a June rate hike fell from 29.9% to 18.5% this morning, according to the CME FedWatch Tool. However, the chance of a 25-basis point July Fed rate hike increased from 52.8% to 59.1%. Significantly, bets on a 50-basis point July interest rate hike fell from 17.1% to 11.9%.
This morning, economic indicators from Australia sent mixed signals, while manufacturing numbers from Japan were bullish. The ASX 200 struggled in response to disappointing business confidence numbers.
However, PBoC action provided support, with China’s central bank cutting the seven-day reverse repo rate from 2.00% to 1.90%.