Stocks rose after data showed American consumers tempered inflation expectations, bolstering sentiment regarding prospects for Federal Reserve rate-cuts this year.

The S&P 500 rebounded after a two-day slide. When traders come back from the holiday weekend, the “T+1” rule will come into effect — making U.S. equities settle in one day rather than two. Treasuries barely budged after Fed Governor Christopher Waller said he still thinks the neutral interest-rate is relatively low, while warning that unsustainable fiscal spending could alter that trend.

Wall Street got a degree of relief as University of Michigan data showed consumers expect prices to climb at a 3.3 per cent annual rate over the next year, down from the 3.5 per cent expected earlier in the month.

“After further review, the consumer is not as pessimistic about the inflation trajectory,” said Jeff Roach at LPL Financial. “Consumer spending could slow, easing up inflationary pressures from the demand side of the economy.”

In a session of low trading volume, the S&P 500 topped 5,300, wiping out this week’s losses. The Nasdaq 100 hit a fresh all-time high, led by gains in Nvidia Corp. and Apple Inc. Crypto stocks climbed as the Securities and Exchange Commission paved the way for the eventual launch of the first U.S. exchange-traded funds investing directly in Ether.

U.S. 10-year yields fell one basis point to 4.47 per cent, with the bond market closing early ahead of the Memorial Day holiday. The dollar halted a four-day winning run. The yen was little changed as Japan’s top currency official reiterated his stance to take steps against excessive moves. Oil and gold edged up.

The consumer outlook dimmed in May as growing cracks in the foundation of the labor market and the realization that interest rates may remain higher for longer weighed on the collective mood, according to Jim Baird at Plante Moran Financial Advisors.

“Will they continue to spend or begin to retrench in anticipation of tougher sledding ahead?” Baird noted. “That’s the unanswered question. If May’s sentiment index provides any indication of the near-term direction, a more pessimistic consumer is likely to tighten their proverbial purse strings a bit in the coming months.”

The Fed’s favored inflation gauge — the core PCE deflator due next Friday — will likely moderate to the slowest monthly pace yet this year, according to Stuart Paul at Bloomberg Economics. However, the moderation was likely related to a sharp drop in volatile airfares — while easing financial conditions continued to boost inflation.

To Quincy Krosby at LPL Financial, the report could offer the market a decidedly positive catalyst if the data comes in cooler than expectations. 

“Absent that, even if the PCE remains steady, the market could be satisfied that inflation remains somewhat contained,” she noted. “But yesterday’s market action suggests that investors and traders alike are losing patience with the Fed’s inability to quell prices that insist on rising.”

Minutes from the two-day Federal Open Market Committee gathering ending May 1 released Wednesday showed that, while participants assessed monetary policy was “well positioned,” various officials mentioned a willingness to tighten further if warranted.

Goldman Sachs Group Inc. economists including Jan Hatzius moved their forecast for the Fed’s first rate cut to September from July.

“Earlier this week, we noted that comments from Fed officials suggested that a July cut would likely require not just better inflation numbers but also meaningful signs of softness in the activity or labor market data,” they wrote.

Florian Ielpo at Lombard Odier Asset Management remarks that it was another week indeed dominated by “Fed anxiety.”

“Let’s however remember that despite rising rates, company earnings appear resilient, subtly suggesting that the impact of what’s typically seen as positive economic news might be less straightforward,” Ielpo said.

Similar to the actual path of inflation itself, mentions of the word on S&P 500 company earnings calls have rolled over, according to Ryan Grabinski at Strategas Securities.

 “However, it is still elevated to pre-pandemic levels, similar to the actual rate of inflation today,” he said. “It will be telling to see how companies deal with elevated inflation over the next several quarters, but given the upward trajectory in margins, it would seem the base case is to continue to push cost on to the consumer.”

To Deutsche Bank AG’s Binky Chadha, the stock market can keep soaring to all-time highs even if the Fed forgoes rate reductions this year as the economy and earnings are growing.

Meantime, Bank of America Corp. strategist Michael Hartnett says the rally in global equity markets is at risk of overheating.

The bank’s so-called global breadth rule shows that about 71 per cent of equity indexes are trading above both their 50- and 200-day moving averages. A reading above 88 per cent would trigger a contrarian sell signal, he said.

While concentrated markets have not historically led to bad returns, it is usually a sign of a healthier economy when breadth – the number of individual stocks and sectors that are doing well – is better, according to Ross Mayfield at Baird Private Wealth Management.

“And while there was some angst last year over heavy concentration in Big Tech stocks, the market has broadened out significantly in recent months,” he noted.

In a bull market with no crashes, no sudden spikes in volatility and no lasting correction, cautious investors are struggling to find effective ways to hedge their positions. 

Buying put options, a traditional choice for protecting against downturns, has failed to pay off for investors wary of the rally that pushed stocks around the globe to new all-time highs. Volatility sellers pushed the VIX Index down to the lowest level since 2019 this month and the S&P 500 Index has gone more than 300 days without a dropping 2 per cent in a single session.

Corporate Highlights:

• The top U.S. auto-safety regulator expanded its investigation into Waymo, the autonomous-vehicle subsidiary of Alphabet Inc., after more incidents were identified in which the company’s cars were involved in collisions or may have violated traffic laws.
• Workday Inc. tumbled after the software company cut its full-year forecast for subscription revenue and said customers were being more cautious with orders.
• Elon Musk’s SpaceX has initiated discussions about selling existing shares at a price that could value the closely held company at roughly US$200 billion, according to people familiar with the matter.
• Health-care payments software firm Waystar Holding Corp. is moving ahead with a planned U.S. initial public offering that’s expected to launch as soon as Tuesday, according to people familiar with the matter.
• Eli Lilly & Co. will spend $5.3 billion to boost production of a key ingredient in its weight-loss and diabetes shots after the treatments’ explosive popularity led to shortages.
• Novo Nordisk A/S’s blockbuster diabetes drug Ozempic cut patients’ risk of dying in a kidney-disease study, the latest research pointing to the medicine’s usefulness in a constellation of disorders.

Some market moves:

Stocks

• The S&P 500 rose 0.7 per cent as of 4 p.m. New York time
• The Nasdaq 100 rose 1 per cent
• The Dow Jones Industrial Average was little changed
• The MSCI World Index rose 0.5 per cent

Currencies

• The Bloomberg Dollar Spot Index fell 0.2 per cent
• The euro rose 0.3 per cent to $1.0849
• The British pound rose 0.3 per cent to $1.2740
• The Japanese yen was unchanged at 156.93 per dollar

Cryptocurrencies

• Bitcoin rose 2.1 per cent to $69,175.88
• Ether fell 0.3 per cent to $3,746.38

Bonds

• The yield on 10-year Treasuries declined one basis point to 4.46 per cent
• Germany’s 10-year yield declined one basis point to 2.58 per cent
• Britain’s 10-year yield was little changed at 4.26 per cent

Commodities

• West Texas Intermediate crude rose 1.1 per cent to $77.75 a barrel
• Spot gold rose 0.2 per cent to $2,334.41 an ounce