Stocks Drop as Inflation Data Spurs Doubts on Fed Rate Cuts
Inflation data released on Tuesday sent shockwaves through the stock market, causing stocks to drop as doubts arose regarding the Federal Reserve’s ability to cut rates multiple times this year. The unexpected spike in Treasury yields following the release of the data added to concerns, casting doubt on the bull case for the equity market.
The Dow Jones Industrial Average experienced a loss of 331 points, equivalent to a 0.9% decrease. The S&P 500 also slid by 1.4%, while the Nasdaq Composite fell by 2.1%. These significant declines were a direct response to the inflation data, which revealed a 0.3% increase in the consumer price index (CPI) for January compared to December. On an annual basis, the CPI rose by 3.1%. Economists had predicted a smaller increase of 0.2% month over month and 2.9% year over year.
The core prices, which exclude volatile food and energy components, saw a month-over-month increase of 0.4% and a year-over-year increase of 3.9%. These figures exceeded expectations, as economists had anticipated a rise of 0.3% in January and 3.7% from a year earlier, respectively.
Art Hogan, the chief market strategist at B. Riley Financial, commented on the situation, stating, “This may well come as an easy excuse to take some of the froth out of the top of this market that’s been universally higher thus far this year.” Hogan emphasized that the slightly higher-than-expected CPI indicates that the market is not following a linear path but rather heading lower.
Following the release of the CPI data, Treasury yields experienced a significant surge. The 2-year Treasury yield surpassed 4.6%, while the 10-year yield topped 4.27%. This sudden increase in yields had a direct impact on the tech sector, with companies such as Nvidia, Microsoft, and Amazon, which had previously led the market to record highs as rates declined, experiencing losses in early trading on Tuesday. All three companies saw their stocks drop by more than 1% in premarket trading.
The stock market’s reaction to the inflation data comes after a mixed session on Wall Street. While the Dow closed at a record high, the S&P 500 and Nasdaq ended the day slightly down. Despite this, all three major averages have been on a five-week winning streak.
In terms of corporate news, JetBlue Airways experienced a significant spike of 12% following activist investor Carl Icahn’s announcement of a nearly 10% stake in the airline. On the other hand, toymaker Hasbro saw a 4.9% decrease in its stock value after failing to meet analyst expectations for the fourth quarter. Additionally, Avis Budget Group witnessed a decline of 9% in its stock price due to disappointing fourth-quarter revenue.
The stock market’s reaction to the inflation data highlights the delicate balance between economic growth and potential rate cuts by the Federal Reserve. As investors continue to monitor inflation trends and the Fed’s response, the market remains uncertain about future rate cuts and their impact on stock performance.