(Bloomberg) – Stocks and bonds fell on Wall Street traders after a new inflation report showed the U.S. Federal Reserve is in no hurry to cut interest rates this year. Oil rose as geopolitical instability resurfaced.
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Stocks extended their decline in April, with the S&P 500 down about 1% as the consumer price index exceeded expectations for the third straight month. Amid a hawkish repricing of the U.S. Treasury curve, the 10-year yield has climbed above 4.5%, with Fed swaps now indicating a bet on only two rate cuts in 2024. A sharp reversal in oil prices also weighed on sentiment, as Bloomberg News reported on the situation in the US and its allies. Believing that a major missile or drone attack against Israel by Iran or its proxies is imminent.
As the Federal Reserve progresses the “last mile” toward its 2% inflation target, the idea of longer interest rates is gaining ground and there are concerns that price pressures may be more than just a “hard road.” . Minutes from the last Fed meeting showed that “nearly all” officials felt it was appropriate to change policy at “some point” this year. However, inflation since then has overturned market expectations.
“It's often said that the Fed takes an escalator up and an elevator down when setting interest rates,” said Charles Schwab's Richard Flynn. “But they seem to choose the stairs as their path down this cycle.”
The Fed's minutes also showed that policymakers “generally support” slowing the pace of shrinking the Fed's asset portfolio by about half.
The S&P 500 fell to around 5,150. The yield on two-year government bonds rose 22 basis points to 4.96%. The dollar was heading for its biggest rally since January. Lower 10-year bond sales at $39 billion also contributed to the rise in yields. Brent crude oil has climbed above $90 again.
The core consumer price index, which excludes food and energy costs, rose 0.4% in March from February, according to figures released by the government on Wednesday. Compared to the same month last year, it increased by 3.8% and remained unchanged from the previous month.
These inflation numbers, along with the jobs report released last week, complicate the timing of the Fed's interest rate cut, said Tiffany Wilding of Pacific Investment Management.
He noted that not only is there a strong case for delaying the first cuts until after mid-year, but it also increases the likelihood that the U.S. will ease policy at a slower pace than developed countries.
“Current inflation is like a 'stubborn child' who refuses to heed his parents' calls to leave the playground,” said Jason Pride of Glenmede. “As a result, investors should prepare for a prolonged period of monetary policy increases.”
That doesn't mean rates will rise, but Jamie Cox of Harris Financial Group says they're still a quarter away from cutting rates.
“We could kiss the Fed goodbye with a rate cut in June,” said Greg McBride of Bankrate. “There's no improvement here. We're going in the wrong direction.”
Fed officials continue to cut interest rates this year, but they won't start cutting rates until June, according to Renaissance Macro Research's Neil Dutta.
“I think July is likely, which means two rate cuts are still a reasonable threshold,” Dutta said. “But if the Fed doesn't get a rate cut in July, investors will have to worry about path dependence. For example, is September too close to the election? If not June 7 month. If it's not July, it's December.”
At the beginning of the year, the amount of relief factored in for 2024 was more than 150 basis points (bp). The forecast was based on the belief that the U.S. economy would slow after the Federal Reserve raised interest rates 11 times in the past two years. On the contrary, the growth data far exceeded expectations.
“Accommodative financial conditions continue to provide significant tailwinds for growth and inflation. As a result, the Fed is not done fighting inflation and interest rates will remain high for an extended period of time,” Apollo Global Management said. said Torsten Slok. “We stand by our view that the Fed will not cut rates in 2024,” he said.
Former Treasury Secretary Lawrence Summers went a step further, saying, “We need to take seriously the possibility that the next move in interest rates will be upward rather than downward.” Such a chance is in the 15% to 25% range, he told Bloomberg TV's Wall Street Week with David Westin.
Despite early evidence that the economy is reheating, the hurdles for the Fed to raise interest rates are quite high at this stage, said Lauren Goodwin of New York Life Investments.
“Signals that interest rates may rise are likely to be met by a rapid tightening of financial conditions in the market,” he said. “Unless inflation accelerates meaningfully, we believe there is sufficient evidence that the cracks in the economy will widen over time to avoid further tightening.”
Another closely watched CPI reading may have been the “final nail in the coffin” for June's rate cut, but 2024 could be a year with two cuts or fewer, according to E's Chris Larkin. It is not yet known whether this will happen or not. *Transactions from Morgan Stanley.
Chris Zaccarelli of the Independent Advisor Alliance said the Fed remains biased toward lower rates, with a rate cut likely to occur in either July or September. Still, if inflation remains high, this may be the only rate cut this year.
“Goldilocks left the building,” he added. “Inflation is no longer falling and expectations for rate cuts will be pushed back further.”
Traders and policymakers alike risk reading too much into stronger-than-expected U.S. inflation trends that have rattled markets and called into question the central bank's rate-cutting cycle, according to Citadel's top macro strategist.
“It has never been a stable path,” Angel Uvide, head of fixed income and macroeconomic research at Citadel, told Bloomberg TV. “However, the inflation rate should gradually converge towards 2%.”
Earnings provide the final support for the resilient rally in stock prices that began last year, as rampant inflation has eliminated the possibility of any rate cuts in the near future.
“The reaction to the CPI data reinforces the view that the stock market is in a downturn,” said Nationwide's Mark Hackett. “Investors may take a different look as focus shifts to earnings season. Strong earnings could lead to further adjustments to rate cut expectations, leaving us with a 'good news is bad news' attitude. There is a possibility that it will return.”
Jose Torres of Interactive Brokers says risk assets are at a crossroads.
“If the Fed implicitly accepts 3% to 4% price pressures, it creates an inflation put, which becomes a new stabilizing factor on top of the traditional Fed and dividend puts,” Torres said. “But if the central bank remains committed to 2% come hell or high water, we will see a meaningful correction in stock prices. is expanding, and this adjustment could be significant.”
Torres said that would help preserve corporate profits while reducing the chance of the economy slipping into recession.
“We are in an environment where stocks are well-valued, market interest rates are rising, and consensus expectations for Fed rate cuts are receding,” said John Lynch of Comerica Wealth Management. . “Therefore, in our opinion, it is imperative that corporate profits continue to expand to justify current stock valuation levels and investor sentiment.”
Wall Street reaction to CPI data:
That's the sound of the June rate cut door slamming shut.
The Fed's last mile was even longer and tougher. The Fed may still be able to cut rates in June, but the story is becoming increasingly difficult.
No matter how you slice the data, it's hard to argue that inflation is falling. The report will be a major disappointment for the Federal Reserve, which has been looking for signs that inflation is continuing to fall toward its target.
The inflation announcement effectively removes June from being eligible for the first rate cut, and a coin toss in July or September should further boost the odds.
This supports the view that the market remains too optimistic about rate cuts this year, given the underlying strength of the US economy.
This number will come as a bit of a blow to those who are optimistic about a June rate cut. Markets have been debating the chances of the Fed cutting rates three times this year, but given these numbers, two cuts may now be more likely.
The US economy is moving at a fair pace, and a June rate cut is becoming increasingly unlikely, with July or September now being called for. The Fed has a headache, and if other central banks were waiting for the Fed to act, they now have a conundrum.
Interest rate markets need to seriously consider the possibility that rising interest rates will continue through at least the summer, and possibly into the end of the year. The numbers didn't shake the Fed's confidence, but they cast a shadow over it.
This is the third strong indicator in a row and means that the story of stalled disinflation is no longer temporary. In fact, even if the inflation rate cools down to a more comfortable level next month, there is likely enough caution within the Fed that it may not be possible to cut interest rates in July.
Company highlights:
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President Joe Biden reiterated his support for American workers opposing a Japanese company's planned takeover of United Steel Corporation, but stopped short of renewing his call for continued domestic ownership. .
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Meta Platforms Inc. is introducing new in-house chips to power its artificial intelligence services, aiming to reduce dependence on semiconductors from Nvidia Corp. and other outside companies.
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Delta Air Lines expects second-quarter revenue to beat Wall Street expectations as it benefits from increased corporate travel and steady leisure demand heading into the summer.
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Macy's appoints two new directors nominated by activist investor Arkhouse Management, which will halt efforts to seek majority representation on its board of directors to acquire the department store operator. agreed.
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Apple assembled $14 billion worth of iPhones in India last year, doubling production in a sign of accelerating diversification outside China.
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Taiwan Semiconductor Manufacturing Co.'s quarterly sales rose at the fastest pace in more than a year, raising hopes that a global AI development boom is stimulating demand for high-end chips and servers.
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UBS Group faces a “significant” increase in its regulatory capital requirements under reforms proposed by the Swiss government following the collapse of Credit Suisse.
This week's main events:
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China PPI, CPI, Thursday
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Eurozone ECB interest rate decision Thursday
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U.S. new unemployment insurance claims, PPI, Thursday
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New York Fed President John Williams speaks Thursday
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Boston Fed President Susan Collins speaks Thursday
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china trade friday
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University of Michigan Consumer Sentiment, Friday
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Citigroup, JPMorgan and Wells Fargo are scheduled to report earnings on Friday.
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San Francisco Fed President Mary Daley speaks on Friday
The main movements in the market are:
stock
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As of 3:02 p.m. New York time, the S&P 500 was down 1.3%.
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Nasdaq 100 fell 1.2%
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The Dow Jones Industrial Average fell 1.5%.
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MSCI World Index falls 1.1%
currency
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Bloomberg Dollar Spot Index rose 0.8%
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The euro fell 1.1% to $1.0736.
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The British pound fell 1.2% to $1.2528.
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The Japanese yen fell 0.8% to 152.95 yen to the dollar.
cryptocurrency
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Bitcoin rose 0.2% to $69,274.82
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Ether fell 0.6% to $3,492.22.
bond
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The 10-year Treasury yield rose 19 basis points to 4.55%.
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Germany's 10-year bond yield rose 6 basis points to 2.44%.
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The UK 10-year bond yield rose 12 basis points to 4.15%.
merchandise
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West Texas Intermediate crude rose 1.1% to $86.19 per barrel.
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Spot gold fell 1.1% to $2,327.82 an ounce.
This article was produced in partnership with Bloomberg Automation.
–With contributions from Sagarika Jaisinghani, Alexandra Semenova, Carter Johnson, Felice Maranz, Liz Capo McCormick, Jessica Menton, Carly Wanna, Natalia Kniazhevich, and Ryan Vlastelica.
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