Market snapshot: comfortable with the new order after Fed rate news

The Federal Reserve may have pared its expectations to just one interest rate cut this year, but an inflation print earlier in the day indicated some further moderation of pressure on prices.

Investors are apparently comfortable with the new order. While the Dow Jones slipped slightly after a choppy trading session, the S&P 500 and Nasdaq drove higher, once more hitting new record closing highs.

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The release of the Consumer Price Index revealed an unchanged level for May, annualising to 3.3%, both of which were better than the expected 0.1% rise and 3.4% rate respectively, and also a step in the right direction from April’s 0.3% increase and 3.4% figure. In addition, core inflation, excluding volatile energy and food prices, were also lower than estimates. The baton will now pass to Producer Price Index and weekly unemployment claims data later today.

Following the inflation print, the Fed announced an unchanged level of interest rates as widely expected, but in what would on other days have met with a negative reaction, Chair Jerome Powell also announced that only one rate cut would likely take place this year. This was in contrast to the previous Fed meeting, where three cuts had been pencilled in and a considerable deviation from the six cuts which the market had been anticipating at the turn of the year.

However, the Fed remains committed to being data dependent before making any alterations as its “higher for longer” mantra which time has shown to be an increasingly prescient view. 

Meanwhile, the “dot plot” measure of rate projections by individual Fed members shifted focus to 2025, where the anticipated number of interest rate cuts rose from three to four, leaving the door open for accommodative measures should the economy weaken sufficiently to justify such a series of moves.

In the meantime, the new record highs which remain driven by the ongoing euphoria around mega cap technology stocks and the prospects for AI in particular were in contrast to any disappointment which the Fed stance may have brought. The S&P 500 has now risen by 13.6% in the year to date and the Nasdaq by 17.3%, while the more traditional Dow Jones index has posted a rather more pedestrian gain of 2.7%.

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Asian markets were broadly positive overnight following the day’s action on Wall Street, initially pushing tech stocks higher in line with the US experience. For the region as a whole, the impending Bank of Japan monetary policy decision is garnering most attention. Interest rates are not expected to rise this week with the possibility of a July hike still in play, but the central bank is increasingly expected to announce a reduction in its bond buying programme in an effort to trim its balance sheet.

Even so, this would do little to ease the current weakness of the yen against the dollar, although the generally positive direction of the economy and increased overseas investor interest has resulted in a strong showing over the last few months from the benchmark Nikkei index.

UK markets failed to join the party in initial trading, with the main indices dipping slightly at the open. The FTSE 100 faced the usual Thursday headwind of a number of stocks being marked ex-dividend, with six companies including Compass Group (LSE:CPG), Intermediate Capital Group (LSE:ICG) and Land Securities Group (LSE:LAND) among those affected. Safety equipment group Halma (LSE:HLMA) rose by over 3% following full-year numbers which predicted strong organic growth alongside an increase of 7% to the dividend.

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The premier index has now risen by 6.1% this year, in addition to which an average dividend yield of 3.6% compounds the total return for investors.

While commodity prices have shown some signs of cooling on questionable growth demand and with the oil price under recent pressure, the FTSE 100 has suffered slightly given the nature of its constituents. Even so, progress for the year reflects some warming of overseas investor sentiment towards the UK as a whole, partly driven by undemanding historic valuations.