U.S. stocks on Wednesday slumped and bonds sold off, after yet another hotter-than-anticipated consumer inflation report severely dented expectations for a Federal Reserve interest rate cut in June.
Wall Street’s three major averages shed more than 1% each. The tech-heavy Nasdaq Composite (COMP:IND) slipped 1.15% to 16,119.83 points in mid-day trade, while the benchmark S&P 500 (SP500) retreated 1.16% to 5,149.39 points. The blue-chip Dow (DJI) lost ground by 1.25% to 38,399.26 points.
Al 11 S&P sectors were in the red, with rate-sensitive name Real Estate posting an outsized loss of about 4%.
Before the opening bell, the U.S. Bureau of Labor Statistics said that the headline consumer price index (CPI) in March rose 0.4% M/M, higher than the expected rise of 0.3%. Core CPI also came in at +0.4% M/M versus a consensus of +0.3%. On a Y/Y basis, headline CPI came in at +3.5% while core CPI increased 3.8%, moving further away from the Fed’s 2% inflation target.
“To start any kind of ‘mid-cycle adjustment,’ the Fed needed to see evident weakness in the economy or the kind of cooler inflation readings that were the norm in 2H 2023. Three months into 2024, we have neither. Cuts get deferred,” the Wall Street Journal‘s Fed watcher Nick Timiraos said on X (formerly Twitter).
Today’s CPI report had some added significance following similar hot readings in January and February. Both the Fed and markets are hoping for signs that inflation will recede further and will finally allow for interest rate cuts.
U.S. President Joe Biden, for whom inflation is a key issue to address to his voters in this election year, said that the CPI report showed inflation had fallen more than 60% from its peak, but cautioned that there was “more to do to lower costs for hardworking families.”
“Prices are still too high for housing and groceries, even as prices for key household items like milk and eggs are lower than a year ago. I have a plan to lower costs for housing—by building and renovating more than 2M homes—and I’m calling on corporations including grocery retailers to use record profits to reduce prices,” Biden said in a statement.
However, today’s CPI data has further highlighted the sticky nature of inflation in Q1 2024, and will likely mean that the Fed will be in no rush to ease policy. Market participants reacted by significantly dialing back their expectations of interest rate cuts. According to the CME FedWatch tool, the odds of a 25 basis point rate cut at the central bank’s June monetary policy committee meeting is now at ~19% compared to around 56% the previous day.
“Ugh. March CPI was a bummer and will surely delay the Fed’s first rate cut. Inflation continues to moderate, and the only thing keeping it from the Fed’s target is shelter costs, which will recede, but nonetheless, the Fed won’t move until this forecast is all but certain,” Mark Zandi, chief economist at Moody’s Analytics, said on X.
Further clues on the Fed’s thinking will be revealed later in the day after the release of the minutes of the central bank’s last monetary policy committee meeting.
Treasury yields made new highs for the year following the CPI report, as traders dumped bonds. The longer-end 30-year yield (US30Y) was up 10 basis points to 4.60%, while the 10-year yield (US10Y) was up 15 basis points to 4.52%. The shorter-end more rate-sensitive 2-year yield (US2Y) was up a whopping 20 basis points to 4.95%.
See live data on how Treasury yields are doing across the curve at the Seeking Alpha bond page.
Turning to active stocks, the first quarter earnings season was unofficially kicked off by Delta Air Lines (DAL). The number one U.S. carrier reported record quarterly revenue on strong travel demand.
