Wall Street ditches rate cut expectations as inflation spike dashes June rate cut hopes
The stock market saw a downturn on Wednesday, often referred to as a "washout," primarily due to a spike in inflation data.
This occurrence dampened expectations that the U.S. Federal Reserve would begin interest rate reductions as early as June.
The three major U.S. stock indexes experienced significant losses after the U.S. Labor Department released the Consumer Price Index (CPI) report, which surpassed consensus expectations.
In March, the Consumer Price Index (CPI), which gauges the prices of goods and services across the economy, increased by 0.4% from February and 3.5% from the previous year. This growth was slightly higher than anticipated.
Core prices, which exclude volatile food and energy categories, also experienced a greater-than-expected increase both on a monthly and annual basis.
Following the release of the inflation data, financial markets have adjusted their expectations, with more bets placed on the Federal Reserve cutting rates only twice this year.
The probability of a 25-basis point rate cut in June has dropped to approximately 15% to 20%, down from around 50% before the report's release.
At the beginning of the year, forecasts indicated six or more rate cuts through 2024.
At the close of the New York Stock Exchange (NYSE), the Dow Jones Industrial Average, a key indicator of blue-chip stocks, dropped by -422.16 points, or -1.09%, settling at 38,461.51.
The Standard & Poor's 500 Index, representing a broad range of stocks, declined by -49.27 points, or -0.95%, closing at 5,160.64.
Meanwhile, the Nasdaq Composite Index, heavily weighted with technology stocks, fell by -136.28 points, or -0.84%, ending the day at 16,170.36.
Of the 11 major sectors of the S&P 500, all except energy ended in negative territory, with real estate shares experiencing the most significant decline.
Interest rate-sensitive stocks bore the brunt of the impact, with real estate poised for its most substantial single-day percentage decline since June 2022.
Among the "Magnificent Seven" tech titans, Alphabet (Google's parent company) declined by -0.3%, Amazon increased by +0.2%, Meta (formerly Facebook) rose by +0.6%, Tesla dropped by -2.9%, Microsoft fell by -0.7%, Apple decreased by -1.1%, Nvidia saw an increase of +2.0%.
In a separate report, the minutes from the Fed's March policy meeting revealed concerns that progress toward the inflation target may have stalled, hinting at a potential need for a more prolonged period of restrictive monetary policy.
This development prompts speculation about whether Fed Chairman Jerome Powell's earlier suggestion of three rate cuts has shifted in light of persistent data indicating resistance to inflation.
Investors will now shift their focus to Thursday's publication of the Producer Price Index (PPI), which could provide further support for Wednesday's (CPI) data, while also gearing up for the start of the first-quarter earnings season on Friday, questioning the rationale behind the recent surge in Wall Street's valuations.
A trio of major banks, including JPMorgan Chase & Co., Wells Fargo & Co., and Citigroup Inc., are slated to unveil their financial results, garnering significant attention from the market.
In the U.S. government bond markets, the yield on the 10-year Treasury, which helps set rates for mortgages and other economy-dictating loans, finished at 4.54%, while the policy-sensitive two-year yield, which tends to reflect market expectations of future Fed moves, closed at 4.97%.
In the cryptocurrency world, Bitcoin, the largest digital currency, has rebounded and surpassed the US$70,000.00 mark after changing hands in an intraday range of 67,570.00 to US$71,086.00 and settled at US$70,600.00.
With the Bitcoin halving approaching, there's speculation about potential trading opportunities.
Despite the current holding pattern, Bitcoin may see a bullish surge, potentially reaching a range between US$78,000.00 and US$81,000.00, followed by a potential pullback to a range between US$56,000.00 and US$58,000.00.
The fourth Bitcoin halving event is anticipated around April 19, 2024.
Meanwhile, Ethereum, the second-largest blockchain in the cryptocurrency market capitalization, experienced mixed trading. It traded within a daily range of $3,529.00 to $3,543.00 before closing at $3,532.00.
Precious metals staged a modest pullback, closing at $2,335.00 per ounce. Meanwhile, silver closed lower at $27.84.
Energy market prices slightly increased, with the global benchmark Brent crude oil reaching $90.55 per barrel, while the U.S. benchmark West Texas Intermediate settled at $85.60.
The U.S. Dollar Index (U.S. DXY), which measures the dollar's strength against six major foreign currencies in the forex market, notably strengthened following the inflation report.
This included a significant increase against major currencies such as the yen, which fell to a low of $153.20, marking its lowest level since June 1990.
Meanwhile, the Eurodollar was 1.0742, and the British pound finished at 1.2536. The Japanese yen ended at 152.82, while the Australian dollar was at 0.6506.
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