Daily Brief - Core Inflation Cools

TLDR: In a surprising turn, US core inflation eased for the second month in a row in May, much to the relief of Federal Reserve officials.

The core consumer price index (CPI) increased by just 0.2% from April. Year-over-year, core CPI rose by 3.4%, marking the slowest annual pace in over three years, according to the latest data from the Bureau of Labor Statistics.

Notably, overall CPI was flat from the previous month, largely due to falling gasoline prices, and increased by 3.3% year-over-year—its tamest rise in nearly two years.

This data, coupled with the previous month's deceleration in core CPI, might signal the beginning of a sustained downward trend in inflation. However, Federal Reserve policymakers have emphasized the need for consistent evidence of receding price pressures before considering any interest rate cuts. This cautious stance is especially pertinent as the latest robust jobs report has reignited discussions on how restrictive current monetary policy is.

The inflation report was released just hours before the Fed's policy meeting conclusion in Washington. While officials are expected to maintain rates at a 20-year high for the seventh consecutive time, there remains the possibility of adjustments to their quarterly economic projections based on the latest CPI data.

Traders have almost fully priced in two rate cuts by the Fed this year, anticipating the first cut as early as November.

Scenario Spotlight: What happens post a cut?

The chart above illustrates the historical 1-month performance of the S&P 500 following past FED rate cuts. Notice the significant potential downside risk!

Market Movers: Historical response from S&P sectors

Here is the historical 1-month response from all S&P sectors post previous rate cuts:

1. S&P Technology: 1.74%
2. S&P Telecom: 1.06%
3. S&P Materials: 0.65%
4. S&P Consumer Staples: 0.19%
5. S&P Health Care: 0.01%
6. S&P Consumer Discretionary: -0.14%
7. S&P Energy: -0.24%
8. S&P Industrials: -0.27%
9. S&P Real Estate: -0.62%
10. S&P Utilities: -1.42%
11. S&P Financials: -1.49%

Earnings Spotlight: Earnings to the rescue?

Adobe's stock has been under pressure since OpenAI introduced competing image and video creation tools, challenging Adobe's market share. As Adobe prepares to release its earnings tomorrow, investors will be closely monitoring the company's Digital Media segment for sustained momentum and insights into its artificial intelligence (AI) monetization strategy.

This comes at a time when software stocks are facing general pressure, exemplified by Salesforce Inc.'s recent downbeat guidance. According to one analyst, the stellar run of software-as-a-service companies since the 2010s might be starting to lose momentum.