Topline
Stocks and bonds flailed Tuesday, as a worse-than-expected inflation reading doused market expectations of a dramatic shift in monetary policy coming any time soon.
Key Facts
Both headline and core inflation were more severe than economists predicted in January, according to the leading indicator of the consumer price index, causing the broad equity selloff with the deteriorating backdrop of equities’ previous rally in the face of easing inflation and potential interest rate cuts which would bolster the value of both stocks and bonds.
The Dow Jones Industrial Average fell 540 points, or 1.4%, shortly after market open, pacing toward its steepest percentage loss of the year.
The S&P 500 and tech-heavy Nasdaq’s 1.4% and 1.8% respective drops are each index’s second-worst days of 2024.
Bonds similarly tanked, as yields for 2-year and 10-year U.S. Treasury notes spiked more than 10 basis apiece to their highest respective levels since early December (higher bond yields signify a loss of value for the asset class).
“Bonds are too expensive if inflation is still a problem and the stock market can’t keep rallying if rates are going to be higher for longer,” explained Chris Zaccarelli, Independent Advisor Alliance’s chief investment officer, in emailed comments.
Big Number
4.25% to 4.5%. That’s the most likely market-implied year-end target federal funds rate, according to CME Group data, implying 100 basis points of rate cuts. That’s significantly lower than the 175 basis points of cuts priced in just a month ago, reflecting investors’ rapidly declining confidence in a dramatic change to the Fed’s monetary policy. The timing of the first lowering of interest rates also grew less optimistic, as June is now the most likely date of the first cut, a dramatic shift from a month ago when March was the most likely scenario.
Key Background
Market expectations for monetary policy more closely align with the prior musings of the Fed, which forecast 75 basis points of cuts in 2024 late last year and maintained inflation remains far too high for a full policy pivot. The Dow, S&P and Nasdaq each remain up big year-to-date and are all up significantly from their 2022 lows shortly after the Fed began hiking rates.
Chief Critic
“Today’s print is just one data point and it’s important to take the improvement in the last 6 months into consideration,” noted Gargi Chaudhuri, head of American investment strategy at BlackRock’s iShares ETFs division, pointing out the Fed uses the personal consumption expenditures index, not the consumer price index released Tuesday, as its primary inflation barometer.