Nasdaq Rises on Tame Inflation Report, Treasury Yields Fall

　　

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The Nasdaq Composite closed higher as investors turned to tech stocks following a relatively modest inflation report. The tech-heavy index gained 1.04% to reach a closing value of 12,306.44, while the S&P 500 added 0.45% to close at 4,137.64. In contrast, the Dow Jones Industrial Average dipped slightly by 0.09% to end at 33,531.33.

April’s consumer prices rose 4.9% compared to the previous year, falling short of economists’ expectations of a 5% increase. This news, along with the in-line month-over-month inflation rate of 0.4% in April, caused Treasury yields to decline. The 2-year Treasury yield fell by around 11 basis points to 3.91%, and the 10-year rate declined by 8 basis points to 3.44%.

While the market reacted positively to the tempered inflation report, cyclical stocks linked to the economy traded lower, with companies like Nike and Caterpillar ending the session in negative territory. Additionally, Airbnb and Twilio saw significant declines of 10.9% and 12.6%, respectively, following weak forecasts. Rivian, an electric vehicle maker, closed 1.8% higher after reporting a narrower-than-expected loss. The focus also turned to earnings reports from Disney and Robinhood.

Investors remained cautious about a potential full-fledged rally despite the more favorable inflation figures. Concerns over the U.S. debt ceiling also weighed on traders’ minds, as the possibility of an agreement being reached before June 1—when the U.S. Treasury Department says a default could occur—became uncertain. President Joe Biden met with congressional leaders, but limited progress was reported. Another meeting is scheduled for Friday to address the issue.

Data by Bloomberg

On Wednesday, the overall market showed a positive trend, with all sectors experiencing a 0.45% gain. The Communication Services sector had the highest increase of 1.69%, followed by Information Technology with a gain of 1.22%. Real Estate and Utilities also performed well, rising by 0.98% and 0.94% respectively.

Consumer Discretionary showed a modest increase of 0.63%, while Health Care and Materials had smaller gains of 0.27% and 0.05% respectively. On the other hand, Consumer Staples experienced a slight decline of -0.15%. Industrials and Financials sectors faced larger decreases of -0.32% and -0.58% respectively. The Energy sector experienced the most significant decline, dropping by -1.15%.

Major Pair Movement

The U.S. dollar initially weakened in response to the Consumer Price Index (CPI) data, which fell short of some expectations, indicating that it may not support the Federal Reserve’s position against rate cuts in the second half of the year. However, risk-off sentiment and book-squaring helped the dollar recover from its early losses, except against the safe-haven Japanese yen. The decline in Treasury yields, driven by the weaker-than-expected inflation data and renewed weakness in regional bank stocks, contributed to the dollar’s recovery.

The Japanese yen benefited the most from the stock market decline and falling yields, as Japanese Government Bond (JGB) yields are influenced by the Bank of Japan’s (BoJ) yield curve control and quantitative easing measures. Speculation is growing that the BoJ’s policy review, amid inflation levels surpassing its target, may lead to higher JGB yields. Additionally, a report highlighting Japanese life insurers’ inclination to reduce their Treasury holdings in favor of JGBs further fueled the exit of long positions in USD/JPY and yen shorts.

Meanwhile, the euro initially rebounded against the dollar following the CPI release but later experienced a modest 0.15% increase as risk-off flows supported demand for the safe-haven dollar. Similarly, sterling’s post-CPI rally to new one-year highs dissipated due to derisking and ahead of the Bank of England’s meeting on Thursday.

Economic Data

Currency	Data	Time (GMT + 8)	Forecast
GBP	BOE Monetary Policy Report	19:00
GBP	MPC Official Bank Rate Votes	19:00	7-0-2
GBP	Monetary Policy Summary	19:00
GBP	Official Bank Rate	19:00	4.50%
GBP	BOE Gov Bailey Speaks	19:30
USD	Core PPI m/m	20:30	0.2%
USD	PPI m/m	20:30	0.3%
USD	Unemployment Claims	20:30	245K