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Wall Street is rising to record levels after inflation finally eases

NEW YORK (`) — U.S. stocks rose to record levels Wednesday on hopes that inflation is finally headed in the right direction after a discouraging start to the year.

The S&P 500 was 0.9% higher in afternoon trading, above its all-time high set in late March. The Nasdaq Composite extended its own record set the previous day at 12:45 p.m. Eastern time, rising 1%, and the Dow Jones Industrial Average rose 270 points, or 0.7%.

Relief came from the bond market, where Treasury yields fell to ease some pressure on the stock market. The moves came as traders increasingly expected that the Federal Reserve could actually cut its key interest rate this year.

Stocks that tend to benefit most from lower interest rates contributed to market leadership. Real estate stocks in the S&P 500 rose 1.5%, while utility stocks rose 1.4%. For investors, their dividend payments look better when bonds pay less interest.

Homebuilders had strong hopes that the Fed’s rate cuts would lead to lower mortgage rates, with Lennar and DR Horton each rising at least 4%. Big tech companies and other high-growth stocks were also hit by the wave of expectations for lower interest rates, and Nvidia’s 3.4% gain was the biggest force pushing the S&P 500 higher.

The optimism came from a report that showed U.S. consumers paid prices for gasoline, car insurance and everything else in April that were overall 3.4% higher than a year earlier. That’s painful, but not as bad as the 3.5% inflation rate in March.

Perhaps more importantly, the slowdown came as a relief after consumer price index (CPI) reports earlier this year were consistently worse than expected. The series of disappointing data dashed forecasts that the Federal Reserve would soon cut interest rates, which are at their highest level in more than two decades.

Lowering interest rates would drive up investment prices and remove some of the downward pressure on the economy.

“There were a lot of lies on today’s CPI data, proving that disinflation over the last three months was merely delayed, not derailed,” said Alexandra Wilson-Elizondo, co-chief investment officer of the Multi-Asset Solutions business at Goldman Sachs Asset Management.

A separate report showed spending growth at U.S. retailers stalled in April compared to March. It was a weaker result than the 0.4% growth expected by economists.

A decline in retail sales could be seen as positive for markets as it could reduce upward pressure on inflation. But a shutdown also raises concerns that cracks could be forming in U.S. consumer spending, which has been a key pillar that has kept the economy out of recession. Low-income households in particular are coming under increasing pressure.

The story goes on

“Hopefully the consumer doesn’t run out of steam, but given pandemic savings spent, defaults rising, wage growth slowing and retail sales now stagnating, a more abrupt slowdown in the economy cannot be ruled out,” said Brian Jacobsen. Chief Economist at Annex Wealth Management.

That could jeopardize one of the greatest hopes that has pushed the US stock market to its record high: the Federal Reserve can manage the balancing act of slowing the economy through high interest rates enough to mitigate high inflation, but not so much that it leads to inflation and bad recession.

Meanwhile, a separate discouraging report released this morning said production in New York state is falling more than expected.

On Wall Street, Petco Health + Wellness added to market leadership after rising 21.1%. It named Glenn Murphy, CEO of investment firm FIS Holdings, as executive chairman.

On the losing side were GameStop and AMC Entertainment as momentum reversed after their stunning start to the week. GameStop fell 32.2%, reducing its weekly gain to 87.5%.

AMC Entertainment plunged 23.8% after announcing it would issue nearly 23.3 million shares of its stock to exchange them for $163.9 million in debt.

In the bond market, the 10-year Treasury yield fell to 4.35% from 4.45% late Tuesday. The two-year yield, which is more closely aligned with expectations of Fed action, fell to 4.74% from 4.82%.

Traders now forecast a 93.3% chance the Fed will cut interest rates at least once this year, according to data from CME Group. That’s up from 89.7% the day before.

Indices in Asia were mixed. In Shanghai, stocks fell 0.8% after China’s central bank left interest rates unchanged. Stocks in Europe rose.

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` writers Matt Ott and Zimo Zhong contributed.

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