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Bubbles on Tuesday as the consumer price index rose unexpectedly high in January, reminding investors that the Federal Reserve’s long-standing battle against inflation has not yet been won. The stock market suffered a sharp decline on Tuesday.
“The market went too far, too fast, and the Fed’s reality is now coming to pass,” Kent Engelke, chief economic strategist and managing director at Capitol Securities Management, said in a phone interview.
Reality can be painful. The Dow Jones Industrial Average DJIA fell nearly 760 points at its low and ended the day down about 525 points, or 1.4%. The S&P 500 SPX fell 1.4%, and the Nasdaq Composite Index fell 1.8%.
As traders readjusted their expectations for interest rate cuts, U.S. Treasuries sold off heavily and yields, which move in the opposite direction of bond prices, soared. The two-year bond BX:TMUBMUSD02Y yield rose 18.7 basis points to 4.654%, the highest level since December 12th.
The consumer price index in January increased by 0.3%, compared with the same month last year to 3.1%, down from 3.4% in the previous month. Core interest rates, which exclude volatile food and energy costs, rose 0.4%, slightly above Wall Street expectations, and year-on-year core interest rates remained unchanged from December at 3.9%.
Investors were reminded that CPI publication dates are subject to change. All three major indexes had their worst CPI day performance since September 13, 2022, according to Dow Jones Market Data.
read more: Dow falls as ‘ugly’ inflation report overturns market expectations for rate cuts
The problem is that investors think inflation concerns are in the rearview mirror, with up to six quarter-point rate cuts by the Federal Reserve this year priced in, and the S&P 500 SPX hitting the 5,000-point milestone last week. It was a breakthrough. At the same time, the Dow Jones Industrial Average DJIA hit a new all-time high, and the Nasdaq Composite Index hit a new all-time high.
I am approaching my own recording area.
Of course, the Fed has defied these expectations. Dotplot forecast locks in for just three rate cuts in 2024, with Fed Chair Jerome Powell and other officials pushing back against the idea that cuts could occur as early as March He consistently insisted that it be done.
Federal funds futures traders have now largely abandoned the prospect of a March rate cut, although they are still pricing in a roughly 37% chance of at least a quarter point cut by the May Fed meeting. That’s down from more than 60% on Monday and the 100th. % One month ago. They currently see a more than 50% chance of four quarter-point rate cuts by the end of the year.
Some observers believe that the Fed (which has so far indicated that its next move will be a rate cut) and investors will change their tune completely if more stubborn inflation data is released. I am concerned that I may be forced to do so.
“Given that core CPI reached 3.9% again and did not fall to the consensus estimate of 3.7%, it not only casts doubt on the timing of the Fed’s rate cut, but also opens the door to a potential rate cut. “We have yet to see a Fed rate hike this cycle,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, in an emailed comment.
Others cautioned against reading too much into one month’s worth of statistics, noting that the numbers clearly would not be perceived as good news by Fed policymakers.
“The last mile to the Fed’s 2% target is always going to be slow, volatile and frustrating,” said Seema Shah, chief global strategist at Principal Asset Management. “Today’s numbers are not what the markets or the Fed were hoping for, but it’s important not to overreact and jump into the belief that inflation is recovering,” she said.
Capitol Securities’ Engelke said stocks were “discounting all the positives” heading into Tuesday’s numbers, leaving the market vulnerable to a sharp selloff likely made worse by algorithmic trading. Stated.
He added that a short-term pullback could prove healthy for the bull market. Based on the simple moving average, it seems reasonable for the S&P 500 index to return to his 4,800 point level, and if this support line fails to hold, he could look at the 4,600 point level.
Engelke said withdrawing this order “would actually be healthy for the market to squeeze out the excess.” “We have to take complacency out of the market. … When you have a couple of big down days, the market is down 5% or 8% in a week and people get really scared. ”
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