Some analysts warned the inflation data could mean not only a delay to rate cuts but also the possibility that the Fed would raise rates further. The Fed has already pulled its main interest rate to the highest level since 2001 in hopes of grinding down high inflation. High rates work by slowing the overall economy and hurting prices for investments.
But it’s still just one data point, which followed several months of encouraging trends where inflation eased, said Chris Larkin, managing director of trading and investing, at E-Trade from Morgan Stanley.
“Until proven otherwise, the longer-term cooling inflation trend is still in place,” he said. “The Fed had already made clear that rate cuts weren’t going to happen as soon as many people wanted them to. Today was simply a reminder of why they were inclined to wait.”
Still, the reaction across Wall Street was immediate and negative.
Yields jumped in the bond market as traders built up expectations that the Fed will keep interest rates high for longer. The yield on the 10-year Treasury rose to 4.28 per cent from 4.18 per cent late Tuesday.
The two-year Treasury yield, which moves more on expectations for the Fed, leaped to 4.61 per cent from 4.47 per cent.
Even after the surprising inflation report, the likeliest outcome is still for the economy to manage a perfect landing and avoid a painful recession while waiting for inflation to cool, said Alexandra Wilson-Elizondo, co-chief investment officer of the multi-asset solutions business in Goldman Sachs Asset Management.
But she said there is still risk that conditions could swing to one of two extremes: Either the economy falls into a recession under the weight of high interest rates, or inflation reaccelerates because of how much stock prices have already climbed and Treasury yields have already fallen on expectations for coming cuts to rates.
The forced recalibration by traders for rate cuts is bringing Wall Street’s expectations closer to what the Federal Reserve has outlined. Fed officials earlier said they were pencilling in three cuts to rates this year, as inflation hopefully cools towards their 2 per cent target from its peak above 9 per cent two summers ago.
Earlier, traders were forecasting as many as six cuts would arrive in 2024, which helped stocks go on a tremendous run since Halloween. The S&P 500 has climbed in 14 of the past 15 weeks. Now, traders are largely betting on three or four cuts this year.
Critics have been warning that stock prices may have climbed too far, too fast given too-optimistic hopes for rate cuts, as well as the risks for a reacceleration in inflation and for a slowdown in the economy. On the upside for markets recently, most companies have been beating analysts’ forecasts for profits in the latest quarter.
Arista Networks joined that parade after reporting stronger earnings and revenue for the latest quarter than expected. But its stock nevertheless sank 4.1 per cent. Underscoring again the power of high expectations, analysts said its stock may have fallen because investors were expecting it to give a better forecast for upcoming results after its stock had risen nearly 20 per cent for the year so far.
Moody’s tumbled 7.6 per cent after the credit-rating company reported weaker profit for the latest quarter than Wall Street had forecast.
Hasbro fell 5.4 per cent after the toy company reported weaker results for the last three months of 2023 than analysts expected.
On the winning side of Wall Street, JetBlue Airways soared 19.9 per cent after activist investor Carl Icahn disclosed he has built up an ownership stake in the airline and said he sees the stock as undervalued.
In stock markets abroad, indexes fell across Europe. In Asia, markets were closed in China for holidays, but Japan’s Nikkei 225 jumped 2.9 per cent and South Korea’s Kospi gained 1.1 per cent.
