Why did the market celebrate?

Thoughts of the Day

US stocks (S&P500 +1.2% and Nasdaq +1.5%) and the US Treasury bond market (US 10-year bond yield fell 0.13%. bond yields fall when prices rise) rose strongly yesterday after the release of US inflation and Retail Sales data. The data showed the inflation and US Retail Sales were softer than expected.

This is the situation that the US Federal Reserve has been hoping for – moderating inflation and slower consumer spending (which in turns eases the pressure on inflation). If we continue to see more data confirming this narrative, the Fed will become more confident in starting their interest rate cut cycle.

As a result, investor risk sentiment strengthened, and asset prices rose. Crypto currencies also joined the rally with Bitcoin rising more than 7% on the day. With no significant inflation data releases till the end of the month, investors are likely to be more optimistic about the inflation outlook till then.

This is an abridged version of our CIO’s daily writeup for the day, to view the full version, please login or subscribe to a membership plan.

Test Yourself

Inflation in the US, as measured by the change in the Consumer Price Index (CPI), declined to 3.4% on a yearly basis in April from 3.5% in March, the US Bureau of Labor Statistics (BLS) reported on Wednesday. This reading came in line with the market expectation amidst worries about a halt to the disinflationary trend.

What do you think is the impact on the S&P 500 futures?

A. The S&P 500 futures rallied.
B. The S&P 500 futures declined.

Hint: The Federal Reserve was expected to cut interest rates this year but the likelihood has been falling due to a reversal in the disinflationary trend in the past few CPI prints. 

Find the answer in “What happened yesterday”.

Day Ahead

Nothing noteworthy on the horizon today.

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What Happened Yesterday

Market Movements as of New York Close 15 May 24

Kashkari(2026 voter, known hawk):
“The Fed is focused on underlying demand in the economy to get inflation down. Americans have been spending more than I would have expected. We probably need to sit here for a while longer to figure out where inflation is headed. With higher US government debt, it might take higher borrowing costs in the nearer term to achieve 2% inflation.”
(Kashkari continues to reiterate his wait-and-see mode, but did not mention the possibility of another hike as he previously did. This could be due to the softer CPI print.)

US Consumer Price Index (headline: +3.4% YoY as expected vs +3.5% prev, +0.3% MoM actual vs +0.4% expected and prev; core: +3.6% YoY as expected and +3.8% prev, +0.3% MoM as expected and +0.4% prev). (Quiz Answer): The S&P 500 futures rallied +0.49% in reaction to the slightly softer print while the US 2 year bond yield fell -0.07% immediately from 4.78% to 4.71%. The lower-than-expected inflation print increases the likelihood of the US Federal Reserve starting to cut interest rates in the months ahead, making it a friendlier environment for risk assets to thrive. 

US Retail Sales (+0% actual vs +0.4% MoM expected and +0.6% prev – revised from +0.7%). Lower-than-expected Retail Sales shows that the US consumer may be starting to falter as the effects of high interest rates are starting to slow consumption.

Australian Labour (Employment Change: +38.5k actual vs +25.3k expected and -5.9k previous.) However, the strength was due to part-time jobs (+44.6K). Full-time jobs decreased -6.1K while unemployment Rate spiked to 4.1% from expectations and the previous print of 3.9% (revised from 3.8%). Despite the headline showing more jobs were added, the details showed a softening labour market. The AUDUSD fell -0.24% in reaction.

The US stock market opened higher from Tuesday due to the softer inflation number from the US. It then traded steadily higher through the New York session. The S&P 500 finished +1.17% higher on the day (high: +1.24%, low: +0.32%), the Dow Jones increased +0.88% (high: +0.95%, low: +0.14%) while the Nasdaq jumped +1.49% (high: +1.55%, low: +0.20%).

After the strong rally this week, meme stocks GameStop and AMC took a breather and fell -18.87% and -20.00% respectively.

The crypto market was boosted by the softer inflation print as well with Bitcoin up +7.44% and Ether up +5.28%.
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Headlines & Market Impact

Japan’s economy skids, complicating BOJ’s rate hike plans

Notable Snippet: Japan’s economy contracted in the first quarter, squeezed by weaker consumption and external demand and throwing a fresh challenge to policymakers as the central bank looks to lift interest rates away from near-zero levels.

Preliminary gross domestic product (GDP) data from the Cabinet Office on Thursday showed Japan’s economy shrank -2.0% annualised in January-March from the prior quarter, faster than the -1.5% drop seen in a Reuters poll of economists. Downwardly revised data showed GDP barely grew in the fourth quarter.

The reading translates into a quarterly contraction of 0.5%, versus a 0.4% decline expected by economists.

Private consumption, which accounts for more than half of the Japanese economy, fell 0.7%, bigger than the forecast 0.2% drop. It was the fourth straight quarter of decline, the longest streak since 2009.

Capital spending, a key driver of private demand, fell 0.8% in the first quarter, versus an expected decline of 0.7%, despite hefty corporate earnings.

External demand, or exports minus imports, knocked 0.3 of a percentage point off first quarter GDP estimates.

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‘What doesn’t kill you makes you stronger,’ China trolls new US tariffs

Notable Snippet: China’s measured response to the U.S. move to hike tariffs on $18 billion of Chinese goods from syringes to batteries suggests relations between the world’s two largest economies face more frost rather than a fresh firefight over trade.

China denounced the Biden administration’s action and vowed “resolute measures” to protect its interests.

But Beijing’s response also suggests a new dynamic – and confidence – compared with 2018 when Trump-era tariffs on $300 billion of Chinese goods touched off an escalating trade war, analysts said.

Among the differences between then and now: the Biden White House flagged potential measures to Chinese officials in advance and the tariffs target industries, including EVs and batteries, where the economic impact is limited and Chinese companies’ dominance appears unassailable.

In response to the tariffs, Chinese state media have shot back, accusing the United States of subverting its own free trade principles and taking action that threatens climate goals and will push up costs for American consumers.

In the starkest language of its response, the Chinese commerce ministry said the White House had broken the spirit of an agreement to steady bilateral relations reached by Chinese President Xi Jinping and U.S. President Joe Biden late last year in San Francisco.

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Senate predicted to overturn SAB 121 in vote Thursday, Hill sources say

Notable Snippet: Joint Resolution 109, which passed the House of Representatives last week with bipartisan support, aims to invalidate the Security and Exchange Commission’s controversial Staff Accounting Bulletin (SAB) 121. 

SAB 121, introduced in March 2022 and enacted the following month, states that digital asset custodians should report a liability and “corresponding assets” on their balance sheets for all custodied cryptocurrencies. 

While not an official agency rule, which would have required a public comment period, SEC staff said that SAB 121 is intended to guard against the “significant risks and uncertainties associated with safeguarding crypto assets.” 

In the Republican-controlled House, 21 Democrats voted in favour of passing the resolution. In the Senate, the resolution needs a simple majority to pass, meaning at least two Democrats and all Republican Senators would have to vote in favour. 

Gensler defended SAB 121 in December, saying it was “just a staff accounting bulletin,” and it is consistent with precedent set in US bankruptcy court. 

“It basically addresses whether liabilities should be on balance sheet, and what we have found actually in bankruptcy court, time and again, many times now, that indeed bankruptcy courts have said that crypto assets are not bankruptcy remote,” Gensler said during a December 2023 appearance hosted by the American Bar Association.

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Stock Indices

Phan Vee Leung
CIO & Founder, TrackRecord