TLT, SPY Both Gain After Fed Meeting, CPI Report

Stock ETFs ended Wednesday on a high note. The SPDR S&P 500 ETF Trust (SPY) jumped 0.9%, closing at its best level ever.

While there were two big events today—the release of May’s consumer price index and a FOMC meeting—the former that had the bigger effect on markets.

The cooler-than-expected inflation data pushed SPY up by around 1% shortly after the opening bell, and stocks largely hung around those levels for much of the day.

Fortunately for stock bulls, the Fed didn’t say or do anything to upset markets. It kept rates steady as expected and made some tweaks to its projections for future rate hikes, but none of that was a major surprise.

The central bank is still on track to reduce rates by one or two times this year, something that may be supportive of stocks—as well as bonds.

The iShares 20+ Year Treasury Bond ETF (TLT) finished the session up 0.8%, off its highs but still a solid showing. 

The U.S. central bank left the interest rate unchanged on Wednesday at between 5.25% and 5.50%, where it has stood since last July, even as the latest inflation report hours earlier showed a slight price downturn in May. 

The bank's Federal Open Market Committee, which oversees rate decisions, has been worried about surprisingly stubborn price pressure that has prevented the central bank from hitting its goal of dropping annual inflation to 2%.  

Earlier Wednesday, the Federal Bureau of Labor Statistics reported that the May Consumer Price Index (CPI), a widely watched inflation measure, registered no gain from the previous month and dropped slightly to 3.3% on an annual basis from April's 3.4.%—slightly lower than analysts had forecast.

The equity markets are carrying the morning’s bullish inflation data into a mid-day rally led by the Nasdaq Composite Index, up more than 1.7%, with the S&P 500 Index up more than 1%.

While odds of the Fed announcing a rate cut later this afternoon remain slim, investors are in a risk-on mood following reports of slower inflation in May.

Jay Hatfield, chief executive of Infrastructure Capital Advisors, has been watching the 15% decline in energy prices and was expecting lower inflation for May and June. Even though the December projections of up to six interest rate cuts in 2024 are now off the table, Hatfield hasn’t completely ruled out at least one rate cut this year.

“We continue to believe that there is a 50% chance of a cut in July and 50% in September as we do expect inflation to continue to print cool next month,” he said. 

Markets popped Wednesday as investors digested a cooler than expected inflation report. The Consumer Price Index (CPI) remained flat in May, compared to a 0.1% increase economists had expected, and easing from the 0.3% jump in April. 

Year over year, inflation eased to 3.3% from 3.4% the prior month. Stripping out volatile categories of energy and food, CPI rose 3.4% on a yearly basis, down from 3.6% in April.

Rate sensitive ETFs rose on the news ahead of the Fed's rate cut decision Wednesday afternoon. TLT, the iShares 20+ Year Treasury Bond ETF jumped over 1% as treasury yields fell on the unchanged inflation report. Treasury prices move in the opposite direction to yields. 

Other Treasury ETFs also rose on the news. VGIT, the Vanguard Intermediate-Term Treasury Index ETF and GOVT, IShares U.S. Treasury Bond ETF both jumped roughly 0.75%.

Bond ETFs have been on a rollercoaster ride as investors have had to contend with a "higher for longer" rate environment as the Fed has remained hawkish against inflation. 

TLT 3-Month

Source: etf.com

The Fed is expected to keep rates unchanged today, with markets betting 99% that interest rates hold steady, according to the CME Fed Watch Tool. Markets have forecasted 3 rate cuts this year, with the first largely anticipated in September.

Growth stocks, which remain highly sensitive to changes in rates also rose in early trading Wednesday.

QQQ, the tech-heavy Invesco QQQ Trust marched over 1.3% higher. Technology stocks struggle in high interest rate environments which take a bite out of future profits. And as Apple continued their developers conference which unveiled the latest updates and technology from the company, tech ETFs with Apple as a large holding benefitted. Apple comprises nearly 22% of XLK, the Technology Select Sector SPDR Fund which soared nearly 2.25% Wednesday.