U.S. inflation data for April came in broadly in line with analyst estimates Wednesday, breaking a concerning three-month streak of higher-than-expected readings and reigniting hopes for a return to the Federal Reserve's 2% inflation target.

Last month, the Consumer Price Index (CPI) showed a year-over-year increase of 3.4%.

Before the inflation report, traders expected the Fed to reduce interest rates by 50 basis points (two 25-basis-point cuts) by the end of the year, beginning in September. The benign April inflation report could further reinforce those expectations.

Simultaneously, the U.S. Census Bureau reported flat monthly growth in retail sales for April, sharply slowing from the downwardly revised 0.6% rise and missing the estimate of 0.4%. When excluding autos, retail sales advanced at a 0.2% pace, decelerating from the previous 0.9% increase but matching the expected 0.2% rise.

April CPI Report: Key Highlights

  • The headline CPI inflation rate surged by 3.4% in April compared to the same month last year, down from 3.5% in March and in line with the forecasted 3.4% increase.
  • On a monthly basis, headline CPI inflation increased by 0.3%, decelerating from the previous 0.4% and missing the predicted 0.4%.
  • Notably, gasoline experienced a 2.8% surge in April, accelerating from 1.5% in March.
  • Excluding energy and food, the core CPI inflation rate eased from 3.8% to 3.6% year-over-year, matching the expected 3.6%. It marks the lowest annual core inflation rate in three years.
  • On a monthly basis, core CPI inflation rose by 0.3%, slightly below the previous 0.4% but in line with estimates.
  • Shelter rose 0.4%, maintaining the same pace as in March.
Market Reactions: Yields, Dollar Drop, Stock Futures Jump

Immediate market reactions to the April inflation report saw Treasury yields easing across the board, with the rate-sensitive two-year yield retreating to 4.72%, crucially breaking below its 200-day moving average.

The U.S. dollar index (DXY), closely tracked by the Invesco DB USD Index Bullish Fund ETF (UUP  ), weakened by 0.5%.

Notably, the U.S. dollar weakened by over 0.7% against the Japanese yen.

Futures on major U.S. equity indices turned to gains during premarket trading. Contracts on the S&P 500 rose 0.3%, on track to hit fresh all-time highs at market open.

Among the top 100 U.S. companies by market capitalization, Tesla Inc. (TSLA  ) was the outperformer, up 2.2% in the premarket. Chipmaker giants Nvidia Corp. (NVDA  ) and Advanced Micro Devices Inc. (AMD  ) followed suit, both up by over 1%.

The tech-heavy Nasdaq 100 index, tracked by the Invesco QQQ Trust (QQQ  ), closed at an all-time high on Wednesday and futures were 0.5% higher at 08:48 a.m. in New York. Contracts on the Russell 2000 were over 1% higher.