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Yields Rise as Traders Cut Fed's Consumer Price Index Bets: Markets Wrap

(Bloomberg) — Bond yields rose and stock futures fell as traders withdrew bets on Federal Reserve interest rate cuts following a higher-than-estimates inflation report.

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Two-year Treasury yields, which are more sensitive to impending Fed action, rose 12 basis points to 4.6%. Fed swaps pushed the full pricing of the rate cut from June to July. S&P 500 contracts fell over 1%, while futures on the tech-heavy Nasdaq 100 underperformed. The dollar rose. A measure of perceived risk in the U.S. investment-grade corporate bond market jumped.

The so-called core consumer price index, which excludes food and energy costs, rose 0.4% from December, the sharpest increase in eight months, government figures showed on Tuesday. Compared to the previous year, it rose by 3.9%. Economists prefer the core indicator as a better indicator of underlying inflation than the headline CPI. This value increased by 0.3% compared to December and by 3.1% compared to the previous year.

Wall Street Reaction to CPI:

“The biggest fear any bull should have is economic growth, but a close second would be inflation, which remains stubborn.”

“This morning's CPI report is a reminder that inflation is a difficult, not well understood problem that does not move in a straight line. Considering that the core CPI was back at 3.9% – rather than falling to 3.7%, which was in line with the consensus forecast – then this not only calls into question the timing of the Fed's rate cuts, but also potentially opens the door Door to the possibility that we have not yet seen the last Fed rate hike of this cycle.”

“We are moving well beyond just looking at the actual rate of inflation and now focusing on the extent of disinflation in goods and services, but it looks like everything is running hotter than hoped.” The Fed will use the language that used in relation to interest rate cuts, feel vindicated as there is little doubt that it will be further delayed. We are not at the stage where we are worried about inflation accelerating again, but we are not out of the woods yet either.”

The story goes on

“The highly anticipated CPI report is a disappointment to those who had expected inflation to fall slightly, meaning the Fed would start cutting rates sooner rather than later. Overall, the numbers were higher than expected, ensuring the Fed needs more data before embarking on a rate-cutting cycle.”

“The 'last mile' is proving, as expected, more difficult and persistent, inhibiting even the most dovish wing of the FOMC.”

“Core CPI for January was higher than expected, so a Fed rate cut is out of the question for now. Real interest rates are still restrictive, but that likely won’t be enough to encourage the Fed to cut rates until there is more certainty that inflation is fully contained.”

“From the Fed’s perspective, economic growth is strong enough that there is no need to cut interest rates.”

“Economic growth will slow but will remain strong enough to keep the Fed from cutting interest rates for longer than necessary. In the meantime, bond investors will enjoy higher returns for a little longer than many thought.”

“The disinflationary trend was expected to continue with a slowdown in headline and core inflation. However, numerous recent economic data, including leading indicators for wages, highlight ongoing inflationary pressures. We saw signs of this in today’s numbers.”

“Tuesday's stronger-than-expected consumer price index could cause the Fed to delay its rate cuts beyond May and June, when the market expects the Fed to begin cutting rates. Achieving the Fed’s magic 2% inflation target could prove more difficult than expected and lead to elevated interest rates for a longer period of time.”

“We view today's above-forecast January CPI report as a negative in the Fed's effort to reduce inflation. If the job market and/or the economy slows noticeably, the Fed can expect plenty of funds. The Fed Funds rate is currently at 525-550, but the consumer price index is higher for now, the economy is strong and inflation is above target, their most likely course of action is to wait until at least May/June.”

Easing price pressures have helped raise expectations in financial markets for interest rate cuts this year, although Fed officials recently dismissed the idea of ​​impending rate cuts. They cite a robust labor market as a reason they can take their time to ensure the reduction in inflation continues before beginning easing.

Money markets recently pared back their bets on rate cuts, pricing in four quarter-point cuts by year-end with a 40 percent chance of a fifth, according to swaps tied to the dates of policy meetings. In comparison, there were more than six a month ago. The first such reduction is fully priced in June, with a two in three chance of a cut as early as May.

When the stock market rises, analysts' views on the companies they cover usually follow suit. This trend is now being turned on its head.

On Friday, “buys” accounted for 56% of overall recommendations for S&P 500 companies, according to data compiled by Bloomberg, which looks at the statistics on a weekly basis. That's the lowest proportion of such ratings in at least three years, when it was around 60%. “Holds” have increased to about 40% since the mid-30s – similar to August 2023 – while “sells” have remained flat.

According to a survey by Bank of America Corp. Investors are betting on US technology stocks as they are the most optimistic about global growth in two years.

The allocation to technology is now at its highest level since August 2020. Exposure to broader U.S. equities has also increased, while easing macroeconomic risks led investors to reduce their cash holdings by 55 basis points from January. Previous such declines in cash holdings have been followed by stock market gains of about 4% in the following three months, strategist Michael Hartnett wrote in a note.

According to strategists at Citigroup Inc., U.S. stock futures posted a strong uptrend in the middle of last week, ending with $18 billion worth of new long positions in S&P 500 futures.

Nasdaq 100 futures also had $7.4 billion in new long positions, and the long positioning on the benchmark was very broad and completely one-sided, wrote a team led by Chris Montagu.

Company highlights:

  • Coca-Cola Co. gave 2024 organic sales guidance that beat expectations, with a diverse product group expected to boost results.

  • GlobalFoundries Inc., the largest U.S. maker of made-to-order semiconductors, gave weak sales forecast for the current quarter, suggesting an oversupply of industrial and automotive components is still weighing on orders.

  • AutoNation Inc., one of the largest car dealership chains in the U.S., beat analysts' fourth-quarter profit and sales expectations.

  • Marriott International Inc. reported fourth-quarter profit that beat estimates as the company benefited from demand growth outside the U.S.

  • Biogen Inc. reported fourth-quarter revenue that fell short of analysts' expectations as the company's multiple sclerosis drugs continued to decline.

  • Shopify Inc. reported fourth-quarter revenue and profit that narrowly beat analysts' estimates, suggesting the Canadian e-commerce giant fended off competition from Asian shopping platforms such as Temu, Shein and TikTok.

  • Activist investor Carl Icahn gave a 9.91% stake to JetBlue Airways Corp. known, described the stock as undervalued and said he had had discussions with management about the possibility of representation on the board.

  • Shares in ASML Holding NV unexpectedly fell by the most in 16 months, with traders attributing the rapid decline to erroneous trading by a market participant.

Important events this week:

  • Eurozone industrial production, GDP, Wednesday

  • BOE Governor Andrew Bailey testifies before the Upper House Economic Affairs Committee on Wednesday

  • Chicago Fed President Austan Goolsbee speaks on Wednesday

  • Fed Vice Chairman for Supervision Michael Barr speaks on Wednesday

  • Japan's GDP, industrial production, Thursday

  • U.S. Empire Manufacturing, Initial Jobless Claims, Industrial Production, Retail Sales, Business Inventories, Thursday

  • ECB President Christine Lagarde speaks on Thursday

  • Atlanta Fed President Raphael Bostic speaks Thursday

  • Fed Governor Christopher Waller speaks on Thursday

  • ECB chief economist Philip Lane speaks on Thursday

  • US construction starts, PPI, consumer sentiment at the University of Michigan, Friday

  • San Francisco Fed President Mary Daly speaks Friday

  • Fed Vice Chairman for Supervision Michael Barr speaks Friday

  • ECB Executive Board member Isabel Schnabel speaks on Friday

Some of the key moves in the markets:

Shares

  • S&P 500 futures fell 1.3% at 9 a.m. New York time

  • Nasdaq 100 futures fell 1.7%

  • Futures on the Dow Jones Industrial Average fell 0.9%

  • The Stoxx Europe 600 fell 1%

  • The MSCI World Index fell 0.2%

Currencies

  • The Bloomberg Dollar Spot Index rose 0.6%

  • The euro fell 0.6% to $1.0703

  • The British pound fell 0.3% to $1.2588

  • The Japanese yen fell 0.8% to 150.49 per dollar

Cryptocurrencies

  • Bitcoin fell 0.6% to $49,532.01

  • Ether rose 0.5% to $2,645.33

Tie up

  • The 10-year Treasury yield rose 10 basis points to 4.27%

  • The 10-year German government bond yield rose three basis points to 2.40%

  • The 10-year UK government bond yield rose eight basis points to 4.13%

raw materials

  • West Texas Intermediate crude rose 0.6% to $77.35 a barrel

  • Spot gold fell 0.8% to $2,003.26 an ounce

This story was produced with support from Bloomberg Automation.

– With support from Elena Popina and Sagarika Jaisinghani.

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