Stocks shot higher out of the gate Wednesday as better-than-expected inflation data hit just as the Federal Reserve wrapped up its June meeting. And two of the three main indexes held onto their gains even after the central bank lowered its rate-cut expectations for this year.
Ahead of the open, the Bureau of Labor Statistics said headline CPI for May was flat on a month-to-month basis and up 3.3% annually. Both figures were lower than what was seen in the April CPI report and came in below economists' expectations.
Core CPI, which excludes food and energy prices, also moderated, up 0.2% from the month prior and 3.4% from the year-ago period. This compares to April's 0.3% month-over-month rise and 3.5% year-over-year increase.
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"The inflation heat from Q1 is reversing, with shelter disinflation continuing and auto insurance prices pulling back," says Sonu Varghese, global macro strategist at Carson Group. He adds that today's data "keeps the Fed on track for cuts in 2024, with the first likely coming in September."
In the aftermath of the May CPI report, market expectations for a September rate cut shot up to 61% from 47% one day ago, according to CME Group's FedWatch Tool.
Fed lowers 2024 rate-cute expectations
However, odds fell to 58% after the afternoon release of the Fed's dot plot showed the central bank is only anticipating one quarter-point rate cut this year, down from three in March.
Amid what the Fed called a "modest" improvement in bringing inflation down to its 2% target, the central bank also chose to leave the federal funds rate at a 23-year high.
In his subsequent press conference, Fed Chair Jerome Powell failed to give market participants any additional clues on the central bank's next move, reiterating its data-dependent approach to interest rates and inflation.
Oracle stock pops on new AI deals
In single-stock news, Oracle (ORCL) shares surged 13.3% after the software company announced a pair of high-profile artificial intelligence (AI) deals with Alphabet's (GOOGL, +0.7%) Google and OpenAI. This, as well as CEO Safra Catz's outlook for "double-digit revenue growth" this fiscal year, helped offset the company's fiscal Q4 earnings miss.
Tesla (TSLA) was another big mover, with the Magnificent 7 stock closing up 3.9% ahead of a shareholder vote to reinstate CEO Elon Musk's estimated $56 billion pay package.
"We have long argued that one of the primary reasons the stock trades at such lofty multiples is the innovation of Musk," says CFRA Research analyst Garrett Nelson (Buy). "If the pay package were to be voted down, we believe it could increase uncertainty regarding the future leadership of the company and jeopardize the 'Musk premium.'"
Target keeps its streak of annual dividend hikes alive
Target (TGT, +0.4%) was also in focus Wednesday after the discount retailer hiked its quarterly dividend by 1.8%. This is more of the same for TGT, which is one of the best dividend stocks for dependable dividend growth. Indeed, the company has raised its payout for 53 straight years.
The retailer is generally well-loved by Wall Street as evidenced by a consensus Buy rating from the 35 analysts following the stock tracked by S&P Global Market Intelligence. Speaking for the bulls is Argus Research analyst Chris Graja (Buy), who says Target has earned its status as a "go-to" retailer and any weakness in the consumer staples stock should be seen as a buying opportunity.
As for the main indexes, the Nasdaq Composite (+1.5% at 17,608) and the S&P 500 (+0.9% at 5,421) finished at new record closing highs. The Dow Jones Industrial Average ended with a 0.09% loss at 38,712 on weakness in Salesforce (CRM, -2.2%).
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