Wall Street experienced a turbulent day as a surge in inflation, revealed by the core consumer price index (CPI), sent shockwaves through both stocks and bonds. The CPI data exceeded estimates, marking the steepest climb in eight months and prompting a retreat from all-time highs in equities. Treasuries faced a sell-off, with two-year yields reaching pre-December Fed “pivot” levels. The market’s anticipation of a rate cut in June was shifted to July. The perceived risk in the US investment-grade corporate bond market surged.
“If Powell and other Fed members hadn’t already thrown cold water on the prospects for a March rate cut a few weeks ago, today’s CPI report might have done that for him,” remarked Jason Pride at Glenmede. He emphasized the evidence of “still-sticky” services inflation, cautioning the Fed against hasty rate cuts to avoid potential inflation waves.
Despite the setback, Pride indicated that rate cuts are still on the table for the year but may commence later than the market expects. The S&P 500 dipped below 5,000, the Nasdaq 100 plummeted by 2%, and major tech companies like Microsoft and Apple faced losses.
The January CPI jump has dented hopes for a March rate cut, according to various financial experts. Chris Zaccarelli at Independent Advisor Alliance stressed that inflation is a complex problem that doesn’t follow a straight line, cautioning against assuming the Fed is finished with raising rates.
Investors may have to wait until later this month for a comprehensive look at consumer prices. The surprise CPI increase in January might be less pronounced in the Fed’s preferred inflation gauge, easing concerns for central bank officials.
Market reactions varied, with some seeing the CPI report as a hurdle to rate cuts in the near term. However, a delayed Fed may present opportunities for certain asset classes. Alexandra Wilson-Elizondo at Goldman Sachs Asset Management recommended a focus on cash-rich companies benefiting from higher real wages.
While the CPI report disappointed those expecting lower inflation, the longer-term cooling inflation trend remains intact, according to Chris Larkin at E*Trade from Morgan Stanley. Quincy Krosby at LPL Financial called it a “disappointment for those who expected inflation to edge lower.”
Investors are currently bullish on US technology stocks, turning optimistic about global growth, as per a Bank of America Corp. survey. Allocation to tech is at its highest since August 2020, and exposure to US equities has increased, signaling a positive sentiment despite the market turbulence.
In the wake of the CPI report, uncertainties linger, and market participants are closely watching for further developments that could shape the Federal Reserve’s stance on interest rates.
