Wall Street interprets "Stimulus Wednesday": CPI is more important than the Fed, AI is unstoppable!

On Wednesday, with CPI and FOMC both on stage, the "good news" of weak inflation seemed to outweigh the "bad news" of the hawkish dot plot.

Overnight, the cooling of US May CPI triggered a frenzy of stock and bond gains in the US, followed by the release of the hawkish dot plot for this year, with only "one rate cut" announced. Fed Chair Powell's remarks were not as dovish as the market expected, leading to a partial retracement of stock and bond gains.

The US dollar reversed most of its early losses caused by the CPI release after the dot plot was published, but still closed lower that night, with the ICE US Dollar Index falling over 0.5% on the day.

Gold showed an initial uptrend followed by a downtrend, with spot gold rising by $30 after the CPI release, then falling below $2320 during Powell's speech, and ultimately closing flat.

Expectations for rate cuts also fluctuated, with weak CPI leading to a surge in rate cut expectations, but the dot plot caused a reversal, mainly due to expectations for 2024.

Broad-based Cooling of Inflation, Powell Focusing More on Employment

Regarding the cooling of May CPI, Powell described it as "an inflation report better than almost everyone expected," but he did not declare the "inflation target achieved," stating that it is close.

Analysis points out that the cooling of inflation is "appropriately" appearing in all the areas it should:

In overall inflation, the breadth of sustained inflation is becoming narrower, with the weighted share of CPI components exceeding 4% dropping from 59% last month to 53%, indicating a narrowing scope of inflation.

In core indices, only two broad categories - medical care commodities and housing indices - had monthly inflation rates exceeding one standard deviation from the "normal levels" of 2017-2019, indicating abnormal price increases in only two areas.

Then there are lagging categories - motor vehicle insurance and housing, with the former transitioning from being a major source of upward inflation pressure over the past year to a slight drag, easing the overall CPI trend.

However, regarding housing inflation, Peter Tchir, Head of Macro Strategy at Academy Securities, expressed some confusion when analyzing the lagged increase in rent, but also made it clear that if data overestimation due to lagging reasons leads to actual inflation issues, the problem could be much more severe than official reports suggest Peter Tchir also pointed out:

Powell is more focused on employment rather than inflation, avoiding an economic recession in an election year is one of his top priorities. Just as we were puzzled by last week's employment report, the media and Powell also seem puzzled. He talks more about long-term average levels, but does not mention the obvious contradictions in the data, the unusually large model of business formation/bankruptcy, or the huge difference between part-time and full-time employment numbers. In summary, the employment situation is cooling down but has not yet become a problem, but if the job market weakens, the Fed is prepared to take action.

AI Once Again in the Market Spotlight

AI seems to be back in the overnight market spotlight, with NVIDIA and Apple's stock prices rising by 3%, and Oracle soaring by 13%.

Peter Tchir stated that it would be a good thing to see sectors that have lagged behind in performance catching up or leading, but currently the market breadth remains narrow, limited to leading technology sectors.

In addition, Peter Tchir believes that bond auctions and fiscal deficits may put pressure on future yields, and bond yields may continue to rise from current levels to a trading range of 4.3%-4.5%. More attention will be needed on fiscal deficits in the future, as the significance of the yield rebound triggered by the "successful" 10-year bond auction last week is minimal, and the auction size will continue to expand every week and month with no signs of contraction