Stocks tanked on Wednesday after March inflation data came in hotter than expected, likely pushing off interest rate cuts by the Federal Reserve that investors have been anticipating.
The S&P 500 had been treading water in April in anticipation of this inflation report following a roaring start to the year where the benchmark rallied 10% for its best first quarter gain in five years.
The CPI in March rose 0.4% for the month and 3.5% year-over-year. Economists polled by Dow Jones had forecasted an increase of 0.3% month over month and 3.4% year on year. Core CPI, which excludes volatile food and energy prices, accelerated 0.4% from the previous month while rising 3.8% from a year ago, compared to estimates for 0.3% and 3.7%, respectively. CPI in April increased at a 3.2% annual pace for all items.
Fed funds futures trading data now suggests just a 20.6% likelihood that the Fed will lower rates at its June meeting, according to the CME FedWatch Tool. Traders are now betting that the first rate cut will likely take place at the central bank’s meeting in September.
The 10-year Treasury yield, a benchmark for mortgage and other loans, soared back above 4.5% as March CPI reaccelerated from the prior month, defying a Federal Reserve hoping for inflation to slow back to its 2% target. The 2-year Treasury yield spiked to nearly 5%.
Bank shares, including JPMorgan Chase and industrial shares like Caterpillar, fell in early trading on worries higher rates will start to suffocate the economy. Once red-hot tech stocks like Nvidia and Meta fell as investors dumped the bull market winners as their Fed rate-cut hopes were dashed.
“Disinflation is out and inflation is in with today’s CPI report,” said Karen Manna, portfolio manager at Federated Hermes. “The forecasts for Fed easing this year will be reassessed even lower.”
“This CPI report provides a jolt to the market. ... [but] I don’t think that the CPI-induced sell-off changes the underlying primary trend,” said Keith Lerner, co-chief investment officer at Truist.
To be sure, Lerner added that “if the Fed’s likely going to be on the sidelines a bit longer, we really need the earnings to come through to justify the move that we’ve seen this year.”
In addition to the big inflation report on Wednesday, investors are also looking forward to the meeting minutes from the Fed’s gathering last month. They will be hunting for clues on where policymakers stand on expected rate cuts this year. Those will be released at 2 p.m. ET.
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