The headline consumer price index dropped to 4.9% in April.
There is hope that the US will not default on its obligations.
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Russel 2000 index futures jumped by more than 1.18% on Wednesday after the US consumer inflation data. The index, which tracks small-cap companies in the US, jumped by more than 1.56%, beating those tied to the Dow Jones and Nasdaq 100 indices.
Economic data by the statistics agency showed that the headline consumer price index (CPI) rose from 0.1% to 0.4%. The basket surveyed rose from $305.24 to $306.49. On a positive side, the headline CPI dropped from 5.0% in March to 4.9% in April. This decline was better than the median estimate of 5.0%.
Meanwhile, core inflation, which excludes the volatile food and energy prices, dropped from 5.6% to 5.5%, in line with expectations. Therefore, the Russell 2000 index rose because of the impact of these numbers to the Federal Reserve.
In its meeting last week, the Fed decided to hike interest rates by 0.25% to 5.25%, as we wrote here. It also pledged to be data-dependent when making its interest rate decision. Therefore, with consumer prices continuing falling, there is a likelihood that the bank will decide to pause further increases. Stocks tend to do well when the Fed is a bit dovish.
The Russell 2000 index also jumped as investors remained optimistic about the debt ceiling issue. Joe Biden and Speaker Kevin McCarthy made no major decision in their meeting on Tuesday. But they agreed to continue talking, with the next meeting set for Friday.
Despite the situation, most analysts believe that the two sides will ultimately reach an agreement before the US is set to default in June. The consequences of a default are so dire for any side to take. It would include a sharp drop of American stocks and a surge in the unemployment rate.
History suggests that the two sides will reach a budget limit deal. We saw that in 2011 when the S&P slashed the US credit rating during another debt impasse.
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Russell 2000 Index