Wall Street experienced a tumultuous trading session, with stocks declining and bonds whipsawing in response to higher-than-expected inflation data. This data dampened expectations for an imminent Federal Reserve rate cut, particularly in March. Despite the disappointment over the consumer price index (CPI), the general consensus among investors is that the Federal Reserve is likely finished with rate hikes and will shift to easing policy in 2024, albeit later than initially anticipated. Cleveland Fed President Loretta Mester indicated that March might be too early for a rate reduction, aligning with market sentiments.
The S&P 500 saw its weekly gains curtailed, particularly impacted by losses in large-cap stocks like Tesla (TSLA) and Apple (AAPL). Meanwhile, U.S. 10-year Treasury yields remained relatively stable but above 4%, with the market pricing in less monetary easing for 2024. The cryptocurrency market also reacted, with Bitcoin (IBIT) paring gains after surpassing $49,000. This came as the first U.S. exchange-traded funds investing directly in Bitcoin began trading. Additionally, oil prices rose following Iran's seizure of a tanker in the Gulf of Oman.
Market Overview:
-A hotter-than-expected inflation reading stuns Wall Street, shaking its hopes for an imminent Fed rate cut and triggering volatility across equities and Treasuries.
-Despite the disappointment, analysts largely predict the Fed's tightening campaign is over, with rate cuts still on the table, albeit slightly delayed from market expectations.
-Megacap tech bears the brunt of the selloff, with Tesla and Apple leading the Nasdaq lower, while oil climbs amid geopolitical tensions in the Gulf.
Key Points:
-The "not great" CPI report dampens the market's celebratory mood, but doesn't fundamentally alter the Fed's trajectory, according to most experts.
-While initial rate cuts might occur later than March, consensus leans towards easing later in 2024, offering long-term relief for investors.
-Fed officials, like Mester, reiterate a cautious approach, emphasizing the need for "sticky" inflation to cool before considering policy loosening.
Looking Ahead:
-Corporate earnings season takes center stage next week, potentially overshadowing lingering inflation concerns.
-Key US banks kick off the reporting cycle, offering insights into the financial sector's health and economic outlook.
-Boeing (BA) faces a formal investigation after last week's incident, adding to the company's ongoing challenges.
-Chesapeake Energy's (CHK) acquisition of Southwestern Energy signals consolidation in the US natural gas market.
-Airbus' record sales reflect the rebound in the aviation industry as travel demand continues to surge.
Experts like Michael Shaoul of Marketfield Asset Management note that the latest inflation data, while suggesting that CPI will remain above 3%, does not indicate an imminent wave of rapid rate cuts. Seema Shah of Principal Asset Management echoed this sentiment, stating that the inflation report confirms the market's overenthusiasm about the timing of rate cuts and the slow pace of disinflation. Despite the initial overreaction, Shah anticipates Fed rate cuts around mid-year, with the market eventually adjusting to this new timeline.
Corporate highlights also influenced market movements. The U.S. aviation sector is under scrutiny, with regulators investigating Boeing Co. following a recent accident. Major U.S. banks like JPMorgan (JPM), Bank of America (BAC), Citigroup (C), and Wells Fargo (WFC) are set to report quarterly results, following a strong performance by bank stocks in the last quarter. Other notable developments include Chesapeake Energy acquisition of Southwestern Energy, Hertz Global (HTZ) decision to sell a portion of its electric vehicle fleet, Airbus SE's record sales, and Grifols SA's ongoing investor concerns.
