(Bloomberg) — Wall Street traders sent stocks and bonds sliding after hotter-than-estimated inflation signaled the Federal Reserve will be in no rush to cut interest rates.
Equities got pummeled across the board, with the S&P 500 down over 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 showing signs of resilience. 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 5,150. Treasury two-year yields, which are more sensitive to imminent Fed moves, rose 18 basis points to 4.9%. The dollar rose the most in two months.
Wall Street’s Reaction to CPI Data:
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.
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.
That’s the sound of the door slamming shut on a June rate cut.
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.
You can kiss a June interest-rate cut goodbye. There is no improvement here, we’re moving in the wrong direction.
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.
The US 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.
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.
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:
Key events this week:
Some of the main moves in markets:
Stocks
Currencies
Cryptocurrencies
Bonds
Commodities
This story was produced with the assistance of Bloomberg Automation.
More stories like this are available on bloomberg.com
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Published: 11 Apr 2024, 02:41 AM IST