MarketView for June 17

Summary

It was a positive day on Wall Street across the board on Tuesday as data pointing to higher inflation lifted financial shares while high-growth tech names attracted renewed attention. The S&P financial sector index was the day's largest gainer, up 0.9 percent, though all cyclical sectors, which are tied to the pace of economic growth, outperformed for the day.

The Consumer Price Index rose 0.4 percent in May, the largest gain in more than a year, pushing investors to sell some U.S. government debt. The yield on the 10-year Treasury rose as high as 2.65 percent.

U.S. crude futures fell 0.5 percent to settle at $106.36 a barrel after President Barack Obama considered options for military action in response to a Sunni militant onslaught in Iraq. Market participants are closely monitoring the situation, worried that it could lead to high oil prices for an extended period. Exxon Mobil fell 0.5 percent to $102.42.

So called momentum stocks, marked by hyper levels of growth and concerns about excessive valuation, gave the Nasdaq an outsized advance. Expedia ended the day up 4.1 percent to close at $77.62 while Netflix added 3.1 percent to $443.65. Keurig Green Mountain gained 4.6 percent to $125.49; the stock is up 66.1 percent year-to-date.

Shares of Adobe Systems were up 6.2 percent to end the day at $71.74 in after-hours trading after the software company reported its second-quarter results and gave a strong outlook.

The Fed began its two-day policy meeting at 10 a.m. as scheduled and is widely expected to conclude with another $10 billion cut of its monthly bond purchases. Investors are also focused on whether officials will tip their hand on longer-term plans for interest rates.

In other economic data released on Tuesday, housing starts and building permits fell more than expected in May.

Approximately 5.61 billion shares changed hands on the major equity exchanges, a number that was above the month-to-date average of 5.36 billion shares according to BATS exchange data.

CPI Rises

The Labor Department reported on Tuesday that consumer prices recorded their largest increase in more than a year in May as costs for a range of goods and services rose, pointing to a steady firming of inflation pressures. According to the Department, the Consumer Price Index increased 0.4 percent last month, with food prices posting their largest increase since August 2011.

The uptick in price pressures should comfort some Federal Reserve officials who had worried that inflation was running too low. Still, the main inflation gauge watched by the Fed continues to run below the Fed’s 2 percent target.

Fed officials start a two-day policy meeting on today and are expected to further trim the QE3 monthly bond buying program, but is not seen raising interest rates until mid-2015.

Last month's increase in consumer prices was the largest since February 2013 and above economists' expectations for a 0.2 percent gain. It followed a 0.3 percent advance in April. In the 12 months through May, consumer prices increased 2.1 percent, the biggest rise since October 2012. That came on top of a 2.0 percent rise in April and was above economists' expectations for a year-on-year increase of 2.0 percent.

Removing food and energy prices, the so-called core CPI rose 0.3 percent, the largest increase since August 2011. It had risen 0.2 percent in April. In the 12 months through May, the core CPI increased 2.0 percent. That was the largest gain since February of last year and followed a 1.8 percent rise in April. Pushing the core CPI higher was a 0.3 percent increase in rents. There were also increases in medical care costs, apparel, new cars prices and airline fares.

Food prices increased 0.5 percent in May, rising for a fifth consecutive month. Prices for meat, dairy, fruit and vegetables rose. Poultry and fish prices also increased as did the cost of eggs. Gasoline prices increased 0.7 percent. Prices for electricity also rose after declining in the prior month.

Housing Starts Fall

Housing starts fell 6.5 percent month-over-month in May, to an annualized pace of 1.001 million units. The expectation had been for a decline of 3.9 percent. April's number was revised down to show a 12.7 percent increase to an annualized pace of 1.071 million units. This compares to an initial reading of a 13.2 percent increase to 1.072 million units in April.

Meanwhile, building permits fell 6.4 percent to 991,000 permits, a number that was worse than the expected 0.9 percent drop to 1.05 million permits. This compares with a downwardly revised 5.9 percent increase in April to 1.059 million permits.