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US stocks hit record closing highs following CPI data

S&P 500

The S&P 500 and the Nasdaq closed sharply up, while the blue-chip Dow turned marginally negative toward the end of the session

The S&P 500 and the Nasdaq scored record closing highs for the third successive session on Wednesday and U.S. Treasury yields pared earlier losses as investors weighed an inflation report against lowered interest rate cut expectations.

The dollar shed some weakness after the U.S. Fed concluded its two-day policy meeting by leaving interest rates unchanged, and released its accompanying policy statement and Summary of Economic Projections (SEP).

The S&P 500 and the Nasdaq closed sharply up, while the blue-chip Dow turned marginally negative toward the end of the session.

The more-hawkish-than-expected Summary of Economic Projections appeared to contradict the Labor Department’s closely watched consumer price index report released earlier in the day, which showed core prices growing at their slowest annual pace in more than three years.

It is a little disappointing to see this continued hawkishness, particularly on the same day where you get one of the softest inflation reports in probably a couple of years, according to Ross Mayfield, investment strategy analyst at Baird. The market is going to struggle a bit with how hawkish the Fed is in light of all of not only this morning’s data, but last week’s as well.

In his press conference following the decision, Fed Chair Jerome Powell acknowledged that inflation has declined substantially but remains too high and rate-cut expectations have been pushed out because of slower-than-expected progress in bringing price growth down to the central bank’s 2% goal.

I think the main takeaway will be that the market was probably expecting the Federal Reserve to shift the dot plot from three cuts to two cuts, Mayfield said. Instead it was shifted from three cuts to one cut, which on margin is a hawkish surprise.

Still, financial markets are pricing in a 61.5% probability of a 25-bp rate cut in September, up from 46.8% on Tuesday, as per CME’s FedWatch tool.

The DJIA dropped 35.21 points, or 0.09%, to 38,712.21, the S&P 500 added 45.71 points, or 0.85%, to 5,421.03 and the Nasdaq Composite gained 264.89 points, or 1.53%, to 17,608.44.

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