Stocks sink, yields jump as hot US inflation erodes hopes for rate cuts

Everyone’s been nervous about today’s CPI report and today the fears all proved to be valid as the numbers all came in even hotter than expected, a 0.4% monthly increase vs estimate of 0.3 and 3.5% yearly vs estimate of 3.4%. All the indexes dropped like a rock and stayed there all day, the Dow down some 600 points at 1 pm.  All this translated to a dramatic drop in rate cut expectations for June and even July.  

In one day, the bets have gone from July to December and with just one cut instead of the hoped for three.  Thursday’s PPI will tell a bigger story as well as Friday’s kickoff of Q1 earnings by the big banks, widely considered a barometer of the rest of the market. Oil has again rallied over more heightened tensions in Gaza and whether today’s killings will stall ceasefire talks. Volume was 11.9 billion, finally above the 4-week average. 

Stocks sink, yields jump as hot US inflation erodes hopes for rate cuts

By Sinéad Carew and Alun John

Wed April 10, 2024 5:14 PM

DJ: 38,883.67  -9.13          NAS: 16,306.64  +52.68       S&P: 5,209.91  +7.52       4/9

DJ: 38,461.51  -422.16      NAS: 16,170.36  -136.28      S&P: 5,160.64  -49.27      4/10

NEW YORK/LONDON, April 10 (Reuters) - Treasury yields surged while equity indexes sank on Wednesday after data showed U.S. consumer prices rose more than expected in March, diminishing hopes for how much and how soon the Federal Reserve can cut interest rates.  In currencies, the dollar index rose across the board after the data while the greenback hit its highest level against Japan's yen since 1990, as traders watched to see if Japanese authorities would intervene to prop up the yen.  With rising costs for gasoline and shelter, the U.S. consumer price index rose 0.4% last month, in line with February, the Labor Department's Bureau of Labor Statistics (BLS) said. This put the year-on-year increase at 3.5%. Economists polled by Reuters had estimated a gain of 0.3% on the month and 3.4% year-on-year.  After the report traders pulled back on rate cut bets now reflecting a roughly 17% chance the Federal Reserve will cut rates in June, down from a roughly 62% chance a week ago. They also pushed bets for a July cut closer to 41% from around 76% last week according to CME Group's FedWatch tool.

"We're in this volatile sticky point right now where the Fed hasn't been able to say 'we've won.' They're going to want to see more data points to give them confidence they'll achieve their 2% inflation goal," said Michael Hans, chief investment officer at Citizens Private Wealth.  "Today does not do that. It continues to reinforce that a patient approach is still prudent," he said. "The market is reacting because there were much higher expectations coming into this data that there would be a cut in June or July." 

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On Wall Street the Dow Jones Industrial Average (.DJI), opens new tab fell 422.16 points, or 1.09%, to 38,461.51. The S&P 500 (.SPX), opens new tab dropped 49.27 points, or 0.95%, to 5,160.64 and the Nasdaq Composite (.IXIC), opens new tab lost 136.28 points, or 0.84%, to close at 16,170.36.

MSCI's gauge of stocks across the globe (.MIWD00000PUS), opens new tab fell 6.91 points, or 0.89%, to 772.32.  Earlier Europe's STOXX 600 (.STOXX), opens new tab index closed up 0.15%. The European Central Bank meets on Thursday and is not expected to change its rate, though it had earlier been indicating that a June rate cut was likely.  In Treasuries, the benchmark 10-year yield US10YT=RR rose over 10 basis points to its highest since mid-November after the inflation report.  The yield on benchmark U.S. 10-year notes rose 18 basis points to 4.546%, from 4.366% late on Tuesday while the 30-year bond yield rose 12.8 basis points to 4.6273% from 4.499% late on Tuesday.  The 2-year note yield, which typically moves in step with interest rate expectations, rose 22.2 basis points to 4.9688%, after hitting its highest level since mid-November.

In currencies, the dollar index gained 1.04% at 105.17, with the euro down 1.04% at $1.0742. Against the Japanese yen , the dollar strengthened 0.77% at 152.94. Oil prices rallied after three sons of a Hamas leader were killed in an Israeli airstrike in the Gaza Strip, fuelling worries that ceasefire talks could stall. Another concern is that continued conflict could drag in countries, particularly Hamas-backer Iran, the third-largest producer in the Organization of the Petroleum Exporting Countries (OPEC).  U.S. crude settled up 1.15%, or 98 cents at $86.21 a barrel and Brent ended at $90.48 per barrel, up 1.19%, or $1.06 on the day.

Investors will now focus on Thursday's producer prices report for a clearer picture of March inflation, and the unofficial kick-off of first quarter earnings season. On Friday, a trio of big banks - JPMorgan Chase & Co (JPM.N), opens new tab, Citigroup Inc (C.N), opens new tab and Wells Fargo & Co (WFC.N), opens new tab - are slated to post results.  Analysts expect aggregate S&P 500 earnings in the first quarter to grow 5.0% from last year, according to LSEG data. That is lower than the 7.2% annual earnings growth for the quarter forecast on Jan. 1.

Most megacap growth stocks slipped with the exception of Nvidia Inc, (NVDA.O), opens new tab which bucked the trend by rising 2.0%.  U.S.-listed shares of Alibaba advanced 2.2% after the company's co-founder Jack Ma released a memo to employees on expressing support for the internet giant's restructuring efforts - a rare move from the billionaire who has spent the last few years away from the spotlight.

Declining issues outnumbered advancing ones on the NYSE by a 5.93-to-1 ratio; on Nasdaq, a 3.58-to-1 ratio favored decliners.  The S&P 500 posted 4 new 52-week highs and 8 new lows; the Nasdaq Composite recorded 35 new highs and 170 new lows.

Volume on U.S. exchanges was 11.91 billion shares, compared with the 11.52 billion average for the full session over the last 20 trading days.