Stocks Rise After May CPI Shows Inflation is Easing

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Stocks closed higher Tuesday after the latest consumer price index (CPI) report raised expectations that the Federal Reserve will pause its run of rate hikes tomorrow when it concludes its June meeting.

However, while the data showed that inflation is easing, some "sticky" readings increased the probability that another rate hike could come at the next Fed meeting in July.

Taking a closer look at the latest CPI report shows that headline inflation was up 4.0% year-over-year and 0.1% month-over-month in May, lower than what was seen in April. Core CPI, which excludes volatile food and energy prices, also rose at a slower annual pace than the month prior but was above economists' estimate. The monthly increase matched April's reading.

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As for which categories saw the biggest jumps in prices, housing and food continued to be the biggest contributors to inflation. The shelter component of the May CPI report was up 0.6% month-over-month and 8.0% year-over-year, while food prices saw a 0.2% monthly and 6.7% yearly increase.

"Keep in mind that we are lapping the peak of the inflation numbers from last year, which is a big driver of the annual deceleration, but we have come a long way," says Michael Reinking, senior market strategist at the New York Stock Exchange (NYSE). "The core-CPI remains sticky, but today's data doesn't force the Fed's hand and the pause/skip seems inevitable for tomorrow."

Indeed, in the wake of today's inflation report, futures traders are now pricing in a 92.5% chance the Fed will leave interest rates unchanged tomorrow, according to CME Group. However, the probability of a quarter-point rate hike in July rose to 60.1% from 52.6% one week ago.

Tesla win streak continues, Nvidia hits major milestone

While today's market focus was mostly trained on inflation and the Fed, there were some notable single-stock movers. Tesla (TSLA), for one, added 3.6% to mark its 13th straight gain – its longest daily win streak to date.

And Nvidia (NVDA) jumped 3.9% to clear the $1 trillion market-cap hurdle for the first time on a closing basis. The semiconductor stock first traded north of the trillion-dollar-mark on an intraday basis late last month.

As for the major indexes, the Nasdaq Composite rose 0.8% to 13,573, the S&P 500 added 0.7% to 4,369, and the Dow Jones Industrial Average gained 0.4% to 34,212.

The pros' top investment strategies

Today's inflation reading cleared up one concern that's been weighing on Wall Street. However, there's still plenty of uncertainty ahead, which is why Alexandra Wilson-Elizondo, deputy chief investment officer of multi asset solutions at Goldman Sachs Asset Management, remains "cautious" on the market.

"With inflation stubbornly high, we do see the business cycle eventually ending in recession, as the Fed will have to break the back of the labor market to make material progress toward their 2% target," Wilson-Elizondo says. She's been advising her clients to hedge against possible downside, but "to remain invested and not sell upside."

Roger Aliaga-Diaz, global head of portfolio construction at Vanguard, shares this "stay the course" outlook. "Research shows that making large changes to your asset allocation to capitalize on short-term market movements is difficult to consistently get right," Aliaga-Diaz says in our feature on the pros' top investment strategies. Be sure to check out Kiplinger's full list of ideas on how to navigate the market, which includes a focus on international stocks and finding opportunities in beaten-down regional bank stocks.

With over a decade of experience writing about the stock market, Karee Venema is the senior investing editor at Kiplinger.com. She joined the publication in April 2021 after 10 years of working as an investing writer and columnist at a local investment research firm. In her previous role, Karee focused primarily on options trading, as well as technical, fundamental and sentiment analysis.