US stocks dropped after data showed inflation remains elevated, bolstering expectations for additional Federal Reserve rate increases. The two-year Treasury yield added more than 11 basis points.
(Bloomberg) — US stocks dropped after data showed inflation remains elevated, bolstering expectations for additional Federal Reserve rate increases. The two-year Treasury yield added more than 11 basis points.
Swaps contracts showed investors now give near-even odds for a quarter-point rate increase by the Fed in June, following similar hikes in March and May. The rate-sensitive two-year Treasury yield rose past 4.6%. It has surged this month on the heels of a blowout jobs report and Fed officials making it clear that they intend to push rates toward 5%.
The stern messaging continued Tuesday after the release of the CPI data: Federal Reserve Bank of Richmond President Thomas Barkin told Bloomberg TV that if inflation persists above the central bank’s targets, “maybe we’ll have to do more.”
“If you think inflation is going to stick around for a while, as we do, then it also means the Fed needs to continue to hike until they really destroy demand,” said Michael Contopoulos, head of fixed income at Richard Bernstein Advisors. “This means they need to crack labor. If you crack labor, long term growth and inflation expectations need to fall as a ‘hard landing’ scenario becomes more likely.”
Inflation’s stickiness could be in seen in egg prices, which rose 8.5% in January, and in record-high monthly payments for a new car. Yet equity bulls clung to one CPI component that Federal Reserve Chair Jerome Powell has singled out as a must-watch: The so-called super-core figure, or core services minus housing, came in at a slower 0.3% pace in the month.
“Bulls will point to the fact that the big driver remains Shelter, which should start to come down quickly in the second half of the year,” Chris Senyek of Wolfe Research wrote. “Bears will point to Used Car prices and other items that have driven recent ‘disinflation’ starting to turn back up.”
Here is what other Wall Street analysts were saying:
Brian Nick, chief investment strategist at Nuveen:
“The Fed has won every single one of these battles over the last 18 months — every time the markets have tried to price out or discount the Fed’s rhetoric or their forecasts, the markets have basically lost that fight, they’ve lost that game of chicken.”
James Athey, investment director at Abrdn:
“These numbers don’t change much at all. The Fed is still in cautious hiking mode as it awaits more data, and indeed awaits the full impact of prior tightening. For that reason, there isn’t much to scare equity markets which are going to presume that mild disinflation and strong jobs means Goldilocks.”
Shawn Cruz, head trading strategist at TD Ameritrade:
“If you start to break up the flexible and sticky components of this report to really see if the stuff that we’d expect is easy to bring down is coming down but the sticky stuff isn’t necessarily coming down alongside that. But we actually did see a little bit of progress.”
Jay Hatfield, CEO and CIO of Infrastructure Capital Advisors:
“We continue to forecast inflation will rapidly decline as the BLS slowly reflects the reality of housing deflation in their estimate of shelter inflation. This lag is approximately 12 months, so second half inflation numbers should come down rapidly.”
John Plassard, investment specialist at Mirabaud:
“It’s the seventh month in a row of inflation going lower, the disinflation narrative is not threatened — on the contrary. It must be said there were some worries around a bad surprise so this is reassuring before the next meeting of the Fed.”
Mark Dowding, chief investment officer at BlueBay Asset Management:
“When data are in-line, there’s more information to be gleaned from how markets react to this than what the actual number was. The price action today could set the tone for the coming week. Our own view is that yields are more likely to head higher as we think the Fed remain hawkish for the time being. This poses a headwind for equities.”
Florian Ielpo, head of macro research at Lombard Odier Asset Management:
“It becomes increasingly clear that getting inflation under control will take more time than expected.”
“The next couple weeks could prove volatile now that most of the earnings season and central bank meetings are behind us, leaving us to ponder whether this inflation report is indeed a good sign for the economy and markets overall.”
Bank of America Corp.’s latest global fund manager survey suggests that while equity markets are on a relentless march higher amid optimism around stronger economic growth and cooling inflation, most investors aren’t convinced the gains will last.
About 66% of participants in the bank’s February survey said stocks are seeing a bear market rally — signaling they expect them to return to new lows. That’s even as the share of investors expecting a global recession fell to 24%, down from a peak of 77% in November. Pessimism around economic growth is at its lowest in a year, while 83% of fund managers see inflation easing further over the next 12 months, the survey showed.
In Europe, gains telecommunications and travel and leisure shares helped push the Stoxx 600 index higher. Vodafone Group Plc shares rose after Liberty Global Plc said it had acquired a stake in the rival British telecom group. TUI AG climbed after the world’s biggest tour operator said summer bookings are running ahead of pre-pandemic levels.
The yen rose following the formal nomination of Kazuo Ueda as the next Bank of Japan governor. Traders have recently increased bets that the BOJ’s yield-curve control and negative-rate policies may be abolished soon under Ueda’s leadership.
The pound climbed after figures showed UK wages rose quicker than expected at the end of 2022, heaping pressure on the Bank of England to deliver another interest-rate increase next month.
Key events:
- US CPI, New York Fed President John Williams gives the keynote speech at New York Bankers Association event Tuesday
- US retail sales, UK CPI Wednesday
- US jobless claims, Australia unemployment, Cleveland Fed President Loretta Mester speaks at Global Interdependence Center event Thursday
- France CPI, Russia GDP Friday
Some of the main moves in markets:
Stocks
- The S&P 500 fell 0.9%, more than any closing loss since Feb. 8 as of 11:41 a.m. New York time
- The Nasdaq 100 fell 0.8%
- The Dow Jones Industrial Average fell 1.1%, more than any closing loss since Jan. 18
- The Stoxx Europe 600 was little changed
- The MSCI World index rose 0.8%, more than any closing gain since Feb. 7
Currencies
- The Bloomberg Dollar Spot Index rose 0.1%, more than any closing gain since Feb. 8
- The euro was little changed at $1.0717
- The British pound was little changed at $1.2148
- The Japanese yen fell 0.5% to 133.04 per dollar
Cryptocurrencies
- Bitcoin surged 1.7%, more than any closing gain since Feb. 1
- Ether surged 3.5%, more than any closing gain since Feb. 1
Bonds
- The yield on 10-year Treasuries advanced nine basis points, more than any closing advance since Feb. 6
- Germany’s 10-year yield advanced eight basis points to 2.45%
- Britain’s 10-year yield advanced 12 basis points, more than any closing advance since Feb. 6
Commodities
- West Texas Intermediate crude fell 1.7% to $78.80 a barrel
- Gold futures fell 0.3%, falling for the fourth straight day, the longest losing streak since Nov. 21
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Julien Ponthus, Sagarika Jaisinghani, Farah Elbahrawy and Vildana Hajric.
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