Closing Market Update Stocks Tumble After CPI Stokes Inflation Worries
schwab.com
Major indexes sank more than 1% after a stronger-than-expected consumer price report triggered a broad sell-off amid fading rate cut hopes.
(Tuesday market close) The Dow Jones Industrial Average® (DJI) tumbled to its lowest close of the month after an unexpectedly strong Consumer Price Index (CPI) report jolted the market, triggering a broad sell-off driven by fears of a potential flare-up in inflation that could forestall Federal Reserve interest rate cuts.
Early Tuesday, the Labor Department said overall CPI rose 0.3% in January from December, while the closely followed core rate, which excludes food and energy, jumped 0.4%. Analysts expected overall and core rate increases of about 0.2% and 0.3%, respectively. Year-over-year CPI rates also exceeded expectations, with a 3.9% core rate increase, which topped estimates for a 3.7% gain.
The CPI data sent Treasury yields soaring as investors backpedaled further on hopes for Fed rate cuts this year, expectations that had already been sharply curtailed in the wake of a strong jobs report. The 10-year Treasury note yield (TNX) surged near 4.32%, its highest level since late November.
"Don't hold your breath on rate cuts," said Collin Martin, director of fixed income strategy at Schwab. "We expected the inflation trend to be bumpy, as the January CPI report showed us, but we don't expect a reacceleration in inflation."
Fed rate cut expectations "have fluctuated widely lately," he added. Tuesday's CPI report "should be enough to take a Fed rate cut in March off the table, and the markets now appear to be pricing in a first rate cut in June."
Here's where the major benchmarks ended:
- The S&P 500® index (SPX) fell 68.67 points (1.4%) to 4,953.17, its lowest close since February 5; the Dow Jones Industrial Average lost 524.63 points (1.4%) to 38,272.75; the Nasdaq Composite® (COMP) dropped 286.94 points (1.8%) to 15,655.60.
- The 10-year Treasury note yield gained nearly 15 basis points to 4.316%.
- The Cboe Volatility Index® (VIX) rose 1.89 to 15.82.
Bank shares were among the worst performers Tuesday amid concerns the CPI numbers suggested the Fed will maintain a higher-for-longer interest rate tack that could crimp lenders' margins. The KBW Regional Banking Index (KRX) plunged 4.5%. Small-cap stocks, another group sensitive to interest rates, also fell sharply, with the Russell 2000® Index (RUT) sinking 4%.
In other markets, the U.S. Dollar Index (DXY) rallied about 0.7% to its strongest level in nearly three months, reflecting expectations interest rates will remain elevated.
According to Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research, some sectors, particularly technology, were technically overbought and vulnerable to a pullback in the wake of the market's climb to record highs this month.
"Technically, we've been due for some consolidation, and the CPI data is providing an excuse to take some profits, especially in artificial intelligence and semiconductor areas of the market," Peterson said.
Stocks on the move
The following companies had stock price moves driven by analyst ratings, quarterly results, or other news:
- Biogen (BIIB) sank 7.4% after the biotechnology company released fourth-quarter results that disappointed investors.
- Coca-Cola (KO) shed 0.6% after the beverage company posted mixed fourth-quarter results, as revenue of $10.85 billion topped forecasts but earnings were in-line with expectations.
- Hasbro (HAS) dropped 1.4% after the toymaker's fourth-quarter earnings and revenue came out lighter than expected and the company forecast weaker full-year revenue on expectations for slower sales.
- JetBlue Airways (SAVE) soared 22% following reports activist investor Carl Icahn said he had taken a 10% stake in the airline, saying the company is undervalued.
- Molson Coors Beverage (TAP) fell 1.3%, erasing early gains after the beermaker's fourth-quarter earnings and sales exceeded forecasts.
- Restaurant Brands International (QSR) tumbled 4.5% even after the company, owner of Burger King and other fast-food chains, reported strong quarterly results.
- Shopify (SHOP) lost 13% after the e-commerce company's better-than-expected quarterly profit and revenue were overshadowed by concerns regarding an outlook for higher costs.
- WK Kellogg (KLG) rallied 8.1% after the cereal company beat Wall Street expectations.
Wednesday's earnings calendar includes Cisco Systems (CSCO), which is expected to report quarterly results after market close. Shares of the networking hardware giant plummeted as much as 13% last November after the company's previous earnings disappointed Wall Street, partly reflecting a scaled-back full-year revenue outlook. Cisco shares managed a modest recovery in recent months but remain more than 14% below last year's closing high, which was just under $58.
Other major companies expected to report results Wednesday include Kraft Heinz (KHC), Owens Corning (OC), Sony Group (SONY), and Wyndham Hotels & Resorts (WH).
Fed seen holding rates steady
Beyond the headline figures, the CPI report carried a few other bothersome numbers for the market, which before Tuesday had grown increasingly encouraged by a mostly steady easing in previous inflation readings over the past year.
Looking "under the hood" of the report, Martin noted that shelter costs picked up, contrary to many economists' expectations for a decline. "Supercore" inflation, which includes core services excluding housing, also reaccelerated, posting its largest monthly increase since April 2022.
"That's bad news for those hoping for rate cuts soon because supercore inflation is something the Fed watches closely," Martin explained.
Market indicators now reflect nearly unanimous expectations the Fed will keep its benchmark funds unchanged following its March policy meeting. The market also pegs sharply higher odds the central bank will stand pat on rates again in May.
Late Wednesday, traders priced nearly 92% odds the fund target will remain unchanged at 5.25% to 5.5% following the March FOMC meeting, according to the CME FedWatch Tool. The tool shows a 64% chance the fed funds rate will be unchanged after the FOMC's May meeting, up from 39% Monday.
Schwab's Martin said rate cuts are still possible later, assuming the Fed is convinced inflation is sustainably at the central bank's 2% long-term target.
"Our outlook for Fed policy in this year hasn't changed," Martin stated. "We still expect three or four rate cuts, but we acknowledge stronger inflation in the near term could push back the timing of the first rate cut."
Investors await a few other key economic updates this week that likely will also factor into expectations for Fed policy and interest rates.
Thursday brings monthly reports for Retail Sales and Industrial Production.Friday includes the Labor Department's Producer Price Index (PPI) January report, which may carry additional weight in terms of market impact in light of its hotter-than-expected CPI counterpart. January Housing Starts and Building Permits are also scheduled for Friday.
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