Wall Street reaches highest levels in a year before central bank meetings

Wall Street ends with gains ahead of central bank meetings

Wall Street experienced gains on Monday ahead of a significant week for central banks worldwide. This led the S&P 500 to its highest level in over a year. Hopes that the economy can avoid a recession and the Federal Reserve will reduce its interest rate hikes have been driving the US stock market forward. Traders expect that the Fed will hold rates steady at its meeting conclusion on Wednesday, making it the first time in over a year where rates haven’t been raised. High-growth stocks are viewed as big beneficiaries of lower rates by investors, especially the tech industry, which alone accounted for over half of the S&P 500 gains

Index Levels

The benchmark index surged up to 0.9% to levels that were last seen since April 2022. The Dow Jones Industrial Average rose to 0.6%, while the Composite Index Nasdaq moved up to 1.5%.

The Economy and Inflation Updates

The Fed has already raised rates to their highest level since 2007 in hopes of curbing inflation, and the increases have contributed to high-profile bank failures in the United States and a multi-month contraction in manufacturing. A pause or halt in increases would, therefore, give the economy and financial markets some leeway. This week also sees the latest updates on the inflation throughout the economy. Economists expect a report on Tuesday to show that consumer prices were 4.1% higher in May than a year ago, well above the Fed’s inflation target set at 2%. However, this value is lower than the 4.9% inflation recorded in April and the peak of more than 9% registered last June.

Given that prices had already risen a year ago due to the poor inflation in 40 years, further increases may not seem so dramatic in the coming months. Inflation could fall to 3.2% in June, and it could see one of the most significant declines in inflation in a two-month period in the past 70 years. However, much of that decline is simply due to how high prices had already risen, and Wall Street traders are still anticipating the Fed to hike rates again in July.

The Tough Spot for Fed

The Fed is in a challenging spot because any rate hike would put more pressure on the US banking system. It is still soaking up all the past rate hikes that led to some clients withdrawing their bank deposits while turning to higher-yielding money market funds. The increased rates have also reduced the value of bonds and other low-interest investments made by banks. “While incoming data points to resilient activity and persistent inflation, the Fed appears to want additional time to monitor policy lags and regional bank stress,” stated a BofA Global Research report.

Economists do not have a clear vision for a Fed pause in June. Recent surprise hikes by central banks in Canada and Australia show it could still be a possibility, but US market assumptions rarely match the projections. A higher inflation report on Tuesday than expected could change that scenario.

Global Central Bank Meetings

Central banks of Europe, Japan and the US will meet jointly this week to discuss interest rates. In the bond market, the 10-year Treasury yield rose to 3.77% from 3.74% on Friday afternoon, and the 2-year Treasury yield, which moves more based on Fed expectations, fell to 4.58% from 4.60%. In European indices, they rose slightly after Switzerland’s UBS declared that it had completed the acquisition of the struggling rival Credit Suisse in government-organized bailout combination that safeguarded Switzerland’s reputation as a global financial center and curbed market turmoil.

(Source: The Australian Financial Review [1])