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The S&P 500 and Nasdaq hit new record highs for the second day on Tuesday, fueled by plummeting Treasury yields and Apple rocketing to all-time highs. Despite a slight sense of caution hanging in the air ahead of the Federal Reserve's policy meeting and critical inflation data, the markets were clearly in a celebratory mood. Wall Street threw caution to the wind this week.

Driven by a noticeable slump in the US economic surprise index and sentiments suggesting that we might have hit peak hawkishness from the Fed and lingering political uncertainties in Europe, Treasury yields took a tumble across the board. A robust demand in a 10-year debt auction propelled prices upward, with the bid-to-cover ratio soaring to 2.67, marking its highest level since February 2022—right before the Fed embarked on its tightening cycle.

Investors eagerly aim to capitalize on these elevated yield levels despite looming high-risk inflation events. This enthusiasm persists even amid expectations that the Fed will resist calls for early rate cuts in the Summary of Economic Projections. The unexpectedly strong performance in the 10-year Treasury auction caught many investors off guard. It's worth noting that in today's market playbook, what benefits bonds often translates into positive outcomes for US indexes.

Despite the initial hawkish signals from the NFP report, equities remain unshaken on the market's second take. While the report initially hinted at tighter monetary policy, with just around 37 basis points of easing priced in for the year, traders had previously anticipated two quarter-point reductions (50bps) due to softer data leading up to the payrolls report. However, the strong NFP headline and robust wage growth have prompted a reassessment.

The upcoming FOMC meeting on Wednesday will provide traders with further clarity. The new dot plot is anticipated to show a shift in the median 2024 marker, reflecting either one or two rate cuts this year, compared to the three predicted in the last two SEPs.

But if May's CPI report lives up to the optimistic whisper expectations ( <.3 %), it could signal the start of a trend with more positive reports in the coming summer months. Indeed, this could pave the way for the Fed to consider rate cuts as early as September, potentially marking a significant shift in monetary policy.

Inflation remains the primary focus for investors, but the narrative might pivot once NFP headline job creation slips below 150,000. At that juncture, investors and the Fed could begin shifting their attention toward employment trends rather than inflationary pressures. So, unless the upcoming job data takes a nosedive, inflation metrics will likely be the decisive factor in determining whether the Fed opts for rate cuts this year. It's safe to say a lot is riding on these inflation inflection points this summer.

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