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The S&P 500 and Nasdaq Composite both achieved record highs, rising 0.3% in subdued trading ahead of this week’s Federal Reserve meeting. While the Dow Jones Industrial Average also saw a modest increase of 0.2%, bond yields, particularly the 10-year Treasury yield, ended higher at 4.468%.
Image Source: CNBC
As investors await crucial inflation data due Wednesday and the Fed’s interest rate decision the same afternoon, market sentiment is buoyed by expectations that the Fed will maintain steady rates.
Attention is particularly focused on the central bank’s economic outlook and comments from Chair Jerome Powell for insights into potential rate movements later in the year. Stocks have been on the upswing recently, driven by hopes that inflation is moving closer to the Fed’s 2% target, allowing for potential rate cuts while the economy stays robust.
Image Source: Wall Street Journal
“Barring stronger-than-expected inflation data, the U.S. economy should continue on its soft-landing trajectory that investors are increasingly confident about,” noted Jason Draho, head of asset allocation Americas at UBS Global Wealth Management. “If it does, be prepared for more all-time market highs.”
Unexpected economic data continues to emerge, however. For instance, the May jobs report released Friday highlighted a significant increase in hiring, contradicting the high-interest rate environment. “The red-hot U.S. payroll data reinforces what an unusual environment this is for the start of a global easing cycle,” stated Jean Boivin, head of the BlackRock Investment Institute.
Despite the robust jobs report, the reaction in stocks was muted, and futures markets have adjusted the likelihood of rate cuts in the near future. Current expectations are a roughly 50% chance of a rate reduction by the Fed’s September meeting.
Investment strategy discussions are heavily focused on the Federal Reserve, with particular attention on the services component of the upcoming consumer-price index report.
“It would be much easier for inflation to return to the Fed’s target if ‘sticky’ services prices start to ease,” said Jason Pride, chief of investment strategy and research at Glenmede.
On the stock front, Nvidia continues to lead the S&P 500’s gains, closing up nearly 1% following a 10-for-1 stock split. Additionally, shares of Southwest Airlines jumped 7% after reports of Elliott Investment Management acquiring a nearly USD 2 billion stake in the company.
Market volatility remains low, with the S&P 500 not experiencing a drop of more than 1% in a single day since April. In contrast, trading in Europe was more turbulent, particularly after French President Emmanuel Macron called for a snap parliamentary election following a strong performance by a far-right party in the European Parliament elections, leading to a 7.5% drop in shares of Société Générale.
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