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Wednesday June 14 2023

May’s CPI tells the Fed it can pause hikes.

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As of TUE, JUN 13, 2023 • 07:56 ET

What you need to know today

Inflation in the U.S. rose just 0.1% from April to May, or 4% on a year-over-year basis. That’s the lowest level in two years. But core inflation, which excludes food and energy prices, remains worryingly high: it’s up 0.4% on the month and 5.3% from a year ago. All numbers are as economists expected.

U.S. stocks rose Tuesday on optimism that the Federal Reserve can skip a rate hike at its meeting later today, though major indexes added less than 1%. The pan-European Stoxx 600 index climbed 0.55% on the back of a 1.5% increase in technology stocks.

AMD will ship its new chip designed specifically for artificial intelligence, the MI300X, later this year. It’ll be the strongest contender Nvidia has faced in the market for AI chip. But AMD faces an uphill battle — Nvidia controls over 80% of market share for AI chips, according to analysts.

The cost of borrowing money in the U.K., as measured by the yield on two-year government bonds, hit 4.8%, higher than it was during Liz Truss’ disastrous “mini-budget.” Today’s yield was pushed up by news that annual wage growth in the U.K. grew the fastest the country had ever seen.

PRO Cathie Wood, the famed CEO of tech-focused Ark Invest, may have dumped Nvidia stocks before its recently rally. But Wood just built a $47 million bet on another artificial intelligence frontrunner, of which stock has soared 125% this year.

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The bottom line

Yeo Boon Ping | Wednesday June 14 2023

May’s consumer price index was mostly great news for traders, who saw it as a sign that the Fed will leave the interest rate unchanged, at least at its meeting Wednesday.

Though the annual rate of inflation at 4% is still two times the Fed’s target, it’s the slowest increase since March 2021. And while there are signs core inflation remains sticky, traders don’t seem as worried since it’s largely pushed up by an 8% rise in shelter prices. That category tends not to reflect the current rental market because the CPI looks at the rental prices people are currently paying, not the rental prices landlords are asking for now. And RealPage data shows rents are up only 2.3% year over year in May, which might signal further cooling in the upcoming months’ CPI.

That leaves room for the Fed to pause its rate hikes. Traders think there’s only a 8% chance the Fed will raise rates, according to CME Group’s FedWatch tool. But just as you can resume a show you’ve paused, so can the Fed return to its regular programming of rate increases. Indeed, Santander’s Chief US Economist Stephen Stanley argues the Fed will pause in June, only to resume hiking in July; BlackRock’s Head of iShares investment strategy Gargi Chaudhuri thinks the Fed will skip while “signaling at least one further hike by the end of 2023.”

Whether the Fed eventually continues its increases depends, of course, on further inflation data. The producer price index comes out later today. While that might be too late to factor into the Fed’s June decision, it’ll give traders a better idea of whether we’re looking at a “pause and play” situation.