The stock market has entered a shortened trading week near record highs, with the Nasdaq Composite and the S&P 500 both closing at record highs for four consecutive days. This hot streak was fueled by softer-than-expected inflation data, which has sparked investor optimism around interest rate cuts.

The May Consumer Price Index (CPI) showed a lower-than-expected increase, which economists believe points to a positive reading of the Fed’s preferred inflation gauge within the Personal Consumption Expenditures (PCE) index later this month. This supports the view that disinflation is the most likely path forward, reducing the likelihood that the Fed has to raise rates.

However, there are concerns that the Fed may be walking too fine of a line with its most restrictive interest rate policy in more than two decades. There are signs of softening in the economy, like a pickup in the unemployment rate, that could rapidly worsen if the Fed holds rates high for too long.

The latest inflation data may add fuel to the current stock market rally. “Inflation falling continues to be one of the primary factors behind the bull market in stocks,” says Julian Emanuel, who leads Evercore ISI’s equity, derivatives, and quantitative strategy.

The S&P 500 and Nasdaq hit four straight record closes last week as investors digested softer-than-expected inflation readings for both consumer and wholesale prices. This helped markets remain optimistic about two interest rate cuts this year, despite the median forecast from Federal Reserve officials favouring one cut.

In conclusion, the current stock market trends are being heavily influenced by inflation data and the potential for interest rate cuts. As we move forward, it will be crucial to keep an eye on these factors and their impact on investor sentiment and market performance.