Wall Street experienced a downturn on Thursday following a report that revealed higher-than-expected inflation rates. This unexpected news caused some investors to adjust their forecasts for when the Federal Reserve might implement interest rate cuts. The S&P 500 was down 0.8% midday, erasing an earlier gain, while the Dow Jones Industrial Average dropped 256 points, or 0.7%, and the Nasdaq composite fell 1%.
Market expectations had been running high as investors anticipated a slowdown in inflation, which would potentially lead the Federal Reserve to make significant interest rate cuts in 2024. However, the inflation report released on Thursday served as a reality check for investors, prompting them to reassess their expectations.
The report revealed that U.S. consumers faced overall price increases of 3.4% in December compared to the previous year. This rate of inflation accelerated from November's 3.1% and slightly exceeded economists' expectations. Nevertheless, when excluding volatile food and fuel prices, the rise in prices from November to December aligned closely with economists' forecasts.
Several analysts believe that this data will cause traders to push back their predictions for the timing of the first interest rate cut. However, there is still hope that the ongoing cooling of inflation, although not in a linear fashion, and a resilient economy will prevent a severe recession.
Seema Shah, Chief Global Strategist at Principal Asset Management, stated, 'Today's inflation report reinforces the notion that the market had gotten a little overexcited around the timing of rate cuts. These are not bad numbers, but they do show that disinflation progress is still slow and unlikely to be a straight line down to 2%.'
Following the release of the inflation report, Treasury yields initially rose as the possibility of a rate cut in March diminished. However, they soon fluctuated. The yield on the 10-year Treasury rose to 4.03% immediately after the report, up from 3.98% prior to its release but still lower than the 4.04% level observed the previous day. Similarly, the two-year Treasury yield experienced a rollercoaster ride, sinking before the report, rising afterward, and then oscillating a few times.
Bank of America economists maintained their forecast for a rate cut in March despite the warmer-than-expected inflation data. They believe that certain drivers of recent price strength, such as used cars, will dissipate in the coming months.
Additionally, oil prices rose, putting pressure on inflation and yields, as they rebounded from earlier declines. The price of a barrel of benchmark U.S. crude increased by 3.1% to $73.47, while Brent crude, the international standard, rose by 2.8% to $78.92 per barrel.
In other news, Chesapeake Energy, a natural gas producer, soared by 5.3% after accepting a $7.4 billion all-stock deal from Southwestern Energy. Conversely, Citigroup fell by 2.8% after revealing a list of charges it would incur in its fourth-quarter results, including issues related to Argentina's troubled economy and a special assessment by the Federal Deposit Insurance Corp. Hertz Global Holdings also experienced a decline of 4.7% as it anticipated a drop in fourth-quarter profits and announced plans to sell around 20,000 electric vehicles, reducing its electric vehicle fleet by a third.
In the cryptocurrency market, Bitcoin's price exhibited volatility following the decision by U.S. regulators to allow trading of the first exchange-traded funds (ETFs) that hold the digital currency rather than just futures linked to it. The hope within the crypto world is that these ETFs will attract new investors, including retirement savers and large institutions. Coinbase Global, which will be responsible for safeguarding bitcoins for some of the ETFs, initially saw gains but later relinquished them, falling by 5.8%.
Global stock markets displayed mixed performances. Tokyo's Nikkei 225 registered a 1.8% increase, reaching its highest level since February 1990, during Japan's period of economic bubble. In Europe, however, most indexes showed declines.
While the report on higher inflation rates caused a setback in the stock market, it also revealed nuanced trends that may offer some encouragement. The overall consensus among analysts is that this data will prompt a revision in expectations for the timing of rate cuts, but it does not alter the fundamental notion that inflation is gradually cooling and the economy is on track to avoid a major recession.
