Crash on Wall Street: Inflation vs. Rate Cut – Forecasts – 12 April 2024


On Wednesday, American stock markets experienced a decline, reaching minimum closing levels against the backdrop of published inflation data, which exceeded experts’ expectations. The figures dampened investor optimism that the US Federal Reserve could begin cutting interest rates by the summer.

The publication of the US Department of Labor’s report on the consumer price index (CPI), which showed results worse than expected, caused an immediate negative reaction in the markets. Major US stock indexes fell sharply into the red as trading began, highlighting the difficulty of getting inflation back to the Fed’s 2% target.

Ryan Detrick, lead market analyst at Carson Group, noted that the surprise inflation data led to a “sell first, ask questions later” strategy. This in turn cast doubt not only on the timing of the first rate cut, but also on the size of the upcoming cut.

Concerns outlined in the minutes of the Fed’s March meeting indicate a possible stagnation of inflation towards the target level, which may require the extension of tight monetary policy beyond the expected period.

U.S. Treasury yields jumped while stock indexes felt pressured to decline after reporting higher-than-expected growth in consumer prices in March. This event reduced confidence in how quickly and to what extent the Federal Reserve could cut interest rates.

In the foreign exchange market, the US dollar index strengthened in response to the release of data, and the dollar against the Japanese yen reached its highest level since 1990. Investors are closely monitoring the possible reaction of the Japanese authorities, who may take steps to stabilize the yen.

A report from the U.S. Bureau of Labor Statistics recorded a 0.4% rise in the consumer price index last month, mirroring February’s trend, due in large part to increases in gasoline and housing costs. This resulted in an annual growth index of 3.5%, compared with economists’ forecasts for 0.3% monthly growth and 3.4% annual growth.

These indicators significantly changed the mood of traders, significantly reducing expectations for the Federal Reserve to cut interest rates in June from 62% to 17%. In addition, the likelihood of a July rate cut was also revised down from 76% to 41%, according to data from CME Group’s FedWatch tool.

Michael Hans, chief investment officer at Citizens Private Wealth, emphasizes that the current environment remains uncertain and challenging for the Federal Reserve, which has yet to declare victory over inflation.

“The Fed would prefer to rely on additional data to support its confidence in achieving its 2% inflation target,” he says. He said the current situation requires a continuation of a cautious strategy, especially as recent data has prompted a revision of expectations regarding the timing of a potential interest rate cut.

Elevated yields on major US government bonds, which topped the 4.5% threshold and reached their highest since last November, put further pressure on stock prices. Sectors most sensitive to changes in interest rates were particularly affected, with the real estate market recording its largest daily decline since June 2022.

Housing stocks posted their biggest daily decline since Jan. 23, while the small-cap Russell 2000 index posted its biggest daily decline since Feb. 13.

Ryan Detrick noted that “the sectors most exposed to interest rates, including real estate, homebuilding and small-cap companies, experienced significant losses today.”

The likelihood of the Fed cutting interest rates by 25 basis points in June fell to 16.5% from 56% just before the report, according to CME Group’s FedWatch tool.

The Dow Jones Industrial Average lost 422.16 points, down 1.09%, to 38,461.51. The S&P 500 fell 49.27 points (down 0.95%) to 5,160.64 and the Nasdaq composite fell 136.28 points (down 0.84%) to 16,170.36.

Among the eleven key sectors of the S&P 500 index, all but energy ended the trading day in the red, with real estate posting the biggest decline.

Investors’ eyes are now on Thursday’s upcoming producer price report, which will provide a clearer picture of inflation in March, as well as the unofficial start of quarterly earnings season.

A new round of reporting begins on Friday when financial giants such as JPMorgan Chase & Co, Citigroup Inc, and Wells Fargo & Co report their financial results.

Analysts expect overall first-quarter S&P 500 earnings to rise 5.0% year-over-year, a notable decline from the 7.2% growth forecast at the start of January, according to LSEG.

Megacorporations in the growth sector were mostly down, but Nvidia Inc was the exception, rising 2.0%.

US shares of Alibaba also saw a 2.2% gain after Jack Ma, the company’s co-founder, addressed a memo to employees in which he supported plans to restructure the Internet giant. It’s a rare message from a businessman who has stayed out of the public eye in recent years.

On the New York Stock Exchange (NYSE), decliners far outnumbered advancers by a ratio of 5.93 to 1. A similar trend was seen on the Nasdaq, where for every gainer, 3.58 falling stocks.

MSCI’s global equity index fell 6.91 points, or 0.89%, to 772.32.

While Europe’s STOXX 600 index ended modestly up 0.15%, investors’ eyes are on the upcoming European Central Bank meeting on Thursday. Forecasts say the bank is likely to keep its current interest rate unchanged, despite earlier hints of a possible rate cut in June.

In the government bond sector, the 10-year US Treasury yield surged above 10 basis points to reach its highest since mid-November following the inflation data. The 10-year U.S. Treasury yield jumped 18 basis points to 4.546% and the 30-year Treasury yield jumped 12.8 basis points to 4.6273%.

The 2-year yield, closely linked to interest rate expectations, rose 22.2 basis points to 4.9688%, hitting its highest since mid-November.

In the foreign exchange market, the US dollar strengthened its position, rising 1.04% to 105.17, while the euro fell 1.04% to $1.0742. Against the Japanese yen, the US dollar rose 0.77% to 152.94.

Oil prices also saw gains, with U.S. crude rising 1.15%, or 98 cents, to $86.21 a barrel, while Brent rose 1.19%, or $1.06, to $90. .48 dollars per barrel.

Gold lost value as the dollar strengthened and Treasury yields rose following an update on inflation data. The spot gold price fell 0.91% to $2,331.12 an ounce, while U.S. gold futures fell 0.58% to $2,329.90 an ounce.



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