Wall Street traders sent stocks and bonds sliding after a hotter-than-estimated inflation report signaled the Federal Reserve will be in no rush to cut interest rates this year.
Equities got pummeled across the board, with the S&P 500 down 1% after the consumer price index topped forecasts for a third month. Treasury 10-year yields hovered near the closely watched 4.5% mark—reaching a fresh high for 2024. Fed swaps priced in only 50 basis points of easing in 2024—which equates to only two rate cuts. The dollar climbed against all of its developed world counterparts.
As the Fed pushes forward in its “last mile” toward the 2% inflation target, investors’ concern is that the recent price pressures may not be just a bump in the road—with the world’s largest economy roaring. For a data-dependent central bank, that means the higher-for-longer rates narrative taking hold again.
“It’s often said that the Fed takes the escalator up and the elevator down when setting rates,” said Richard Flynn at Charles Schwab. “But for the path downwards in this cycle, it looks like they will opt for the stairs.”
All major groups in the S&P 500 retreated, with the gauge down to around 5,160. Treasury two-year yields, which are more sensitive to imminent Fed moves, surged 20 basis points to 4.95%. The dollar rose the most in two months. The loonie trimmed losses after Bank of Canada officials signaled they need more evidence of slowing inflation.
Wall Street’s Reaction to CPI Data
- Jason Pride at Glenmede:
Inflation right now is like the stubborn child that refuses to heed the parent’s call to leave the playground.
Two cuts is now likely the base case for 2024, down from 3 just a month ago and 6-7 expected cuts at the start of the year. As a result, investors should be prepared for a higher-for-longer monetary regime.
- Jamie Cox at Harris Financial Group:
Rates aren’t going higher, but the distance to a rate cut is another quarter.
- Torsten Slok at Apollo Global Management:
Easy financial conditions continue to provide a significant tailwind to growth and inflation. As a result, the Fed is not done fighting inflation and rates will stay higher for longer.
We are sticking to our view that the Fed will not cut rates in 2024.
- Matthew Weller at Forex.com and City Index:
No matter how you slice the data, it’s hard to argue that inflation is falling. For a central bank that was looking for any sign that inflation was continuing to fall toward its target, this report will be a big disappointment for the Federal Reserve.
- Jeff Schulze at ClearBridge Investments:
The battle between the sticky vs continued disinflationary narratives is moving decidedly toward an inflation backdrop that is plateauing and potentially accelerating. This inflation release effectively takes June off the table for the first rate cut and should push the odds out further with a coin toss in July or September.
- Chris Zaccarelli at Independent Advisor Alliance:
Goldilocks has left the building—inflation isn’t coming down anymore and rate-cut hopes are going to be pushed off even further into the future.
We believe the Fed still has a bias to cut rates and they are likely to still cut interest rates by 25 bps in either July or September—but if the inflation data remains sticky then that may be the only rate cut we get this year.
- Charles Hepworth at GAM Investments:
For the June rate cut optimists, this reading is a bit of blow. Markets have been wrestling with the likelihood of the Federal Reserve delivering on three rate cuts this year, but on these numbers, two rate cuts may now be the more likely outcome.
- Chris Larkin at E*Trade from Morgan Stanley:
A third-straight hotter-than-expected CPI may have been the final nail in the coffin for a June rate cut, but it remains to be seen whether 2024 will turn out to be a two-cut year, or something less.
The other question is whether the stock market will see this as more than a “bump” in the inflation road. We’ve seen sharp moves after other CPI surprises reversed in a day or two, but if today’s reaction in the pre-market is any indication, the recent volatility may not have run its course.
- David Kelly at JPMorgan Asset Management:
That’s the sound of the door slamming shut on a June rate cut.
- Ian Lyngen at BMO Capital Markets:
Core-CPI at +0.4% takes June cut off the table. Overall, the figures materially undermine the Fed’s assumption that Jan/Feb were simply a bump in the road toward normalization.
- Greg McBride at Bankrate:
You can kiss a June interest-rate cut goodbye. There is no improvement here, we’re moving in the wrong direction.
- Richard Flynn at Charles Schwab:
In recent months it has become clear that the journey to the Fed’s target of 2% inflation will be bumpy. It’s often said that the Fed takes the escalator up and the elevator down when setting rates, but for the path downwards in this cycle, it looks like they will opt for the stairs.
- Neil Birrell at Premier Miton Diversified Funds:
The U.S. economy is running along at quite a pace and a June rate cut looks less and less likely—July or September is the call now. The Fed has got some head scratching to do and if other central banks were waiting for the Fed to move, they have got a conundrum on their hands now.
- Lindsay Rosner at Goldman Sachs Asset Management:
The rates market needs to seriously consider the likelihood of higher-for-longer at minimum lasting through the Summer and potentially through the end of the year. This number did not eclipse the Fed’s confidence, it did, however, cast a shadow on it.
- Seema Shah at Principal Asset Management:
This marks the third consecutive strong reading and means that the stalled disinflationary narrative can no longer be called a blip. In fact, even if inflation were to cool next month to a more comfortable reading, there is likely sufficient caution within the Fed now to mean that a July cut may also be a stretch.
Corporate Highlights
- Delta Air Lines Inc. expects earnings to exceed Wall Street’s projections for the second quarter as the carrier benefits from a step-up in corporate travel and steady leisure demand heading into summer.
- Macy’s Inc. named two new directors nominated by activist investor Arkhouse Management Co., which agreed to end its effort to seek majority board representation as it attempts to acquire the department-store operator.
- Apple Inc. assembled $14 billion of iPhones in India last fiscal year, doubling production in a sign it’s accelerating a push to diversify beyond China.
- Taiwan Semiconductor Manufacturing Co.’s quarterly revenue grew at its fastest pace in more than a year, shoring up expectations that a global boom in AI development is fueling demand for high-end chips and servers.
- UBS Group AG faces a “substantial” increase in regulatory capital requirements under reforms that the Swiss government is advocating for in the wake of the collapse of Credit Suisse.
- KKR & Co. laid out a plan to scale its core businesses as it aims to reach at least $1 trillion of assets under management in five years.
Key events this week:
- China PPI, CPI, Thursday
- Eurozone ECB rate decision, Thursday
- U.S. initial jobless claims, PPI, Thursday
- New York Fed President John Williams speaks, Thursday
- Boston Fed President Susan Collins speaks, Thursday
- China trade, Friday
- U.S. University of Michigan consumer sentiment, Friday
- Citigroup, JPMorgan and Wells Fargo due to report results, Friday.
- San Francisco Fed President Mary Daly speaks, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 fell 1% as of 9:57 a.m. New York time
- The Nasdaq 100 fell 0.8%
- The Dow Jones Industrial Average fell 1.2%
- The Stoxx Europe 600 fell 0.2%
- The MSCI World index fell 0.9%
Currencies
- The Bloomberg Dollar Spot Index rose 0.7%
- The euro fell 1% to $1.0752
- The British pound fell 0.9% to $1.2569
- The Japanese yen fell 0.6% to 152.69 per dollar
Cryptocurrencies
- Bitcoin fell 1.4% to $68,159.51
- Ether fell 1.6% to $3,457.61
Bonds
- The yield on 10-year Treasuries advanced 13 basis points to 4.49%
- Germany’s 10-year yield advanced five basis points to 2.42%
- Britain’s 10-year yield advanced eight basis points to 4.11%
Commodities
- West Texas Intermediate crude rose 0.2% to $85.37 a barrel
- Spot gold fell 0.9% to $2,331.14 an ounce
This story was produced with the assistance of Bloomberg Automation.
This article was provided by Bloomberg News