Markets dropped sharply on Wednesday after March’s CPI reading accelerated to a 3.5% annual rate, up from February’s 3.2%. More concerning, the core CPI, which strips out volatile food and energy prices, was up 3.8% from a year earlier. Though this is unchanged from the previous month, it is still higher than anticipated. Indeed, the CPI numbers came in hotter than expected for a third straight month, suggesting that the Fed’s progress addressing inflation has stalled.
All major U.S. indexes finished the day deep in the red, extending their April losses, with the Dow Jones Industrial Average (DJIA) dropping over 1%. The tech benchmarks Nasdaq Composite (NDAQ), and Nasdaq-100 (NDX) lost about 0.9% on the day. The S&P 500 (SPX) fell by almost 1%, with all its sectors except Energy dropping, with the rate-sensitive Real Estate sector tanking the most.
No Confidence for Rate Cuts
The minutes from the last Federal Reserve meeting showed that policymakers found it inappropriate to reduce policy rates until they gained confidence that inflation is on a sustainable path towards their 2% targets.
As the consumer-price inflation report didn’t provide evidence of subsiding inflation pressures, markets reduced their June rate-cut expectations to about 16% from almost 60% a week ago, according to the CME FedWatch Tool.
The futures markets assigned the greatest odds to a total rate decrease of 0.5% this year, pushing their expectations for the first cut to September. Moreover, some Wall Street strategists have started to voice doubts about any rate decreases this year, saying that sticky inflation, a robust labor market, and strong economic growth could mean that rate cuts are off the table for the near future.
PPI and Earnings in Focus
Investors are now focusing on March’s producer-price inflation report scheduled today. The PPI, serving as a leading indicator for short-term trends in consumer prices, is expected to have declined from February. If these expectations are confirmed, it could ease the central bank members’ inflation concerns.
Tomorrow, the Q1 2024 earnings season begins with a trio of the largest banks – JPMorgan (JPM), Citigroup (C), and Wells Fargo (WFC) – slated to post their results. These U.S. financial behemoths are expected to show strong results thanks to high net interest income and trading profits.
However, reports of non-financial corporates further down the road have far greater significance for market sentiment. The reduced probability of a rate cut in this quarter means that earnings will serve as the sole support for the next leg of the stock-market rally. Wall Street strategists are optimistic about Q1 earnings, penciling in a 10% year-on-year increase in earnings.
Notable Stock News
¤ Nvidia (NVDA) rallied almost 2% amid a down market, as investors picked up the chipmaker’s shares after a significant correction.
¤ GE Vernova (GEV), which was spun off from GE (GE) last week, surged 4.7% on Wednesday after receiving an upgrade to “Buy” from JP Morgan’s analysts.
¤ Deckers Outdoor (DECK) tumbled after the stock was downgraded to “Hold” at Truist Financial and investors rushed to bag a 77% stock price increase in the past 12 months.
¤ Tesla (TSLA) dropped along with other automakers, weighed down by reduced rate-cut expectations. Target-price reductions by BofA and Piper Sandler analysts also spurred the stock’s decline.
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