Wall Street traders reacted strongly to another hot inflation report, signaling that the Federal Reserve is unlikely to cut rates this year. Stocks and bonds slid, while oil prices rose due to resurfacing geopolitical jitters.
Equities continued their losses in April, with the S&P 500 down approximately 1% as the consumer price index exceeded forecasts for the third consecutive month.
This led to a hawkish repricing of the Treasury curve, with 10-year yields surpassing 4.5%, and Fed swaps indicating bets on only two rate cuts for 2024.
Additionally, concerns about potential missile or drone strikes by Iran or its proxies on Israel weighed on sentiment, contributing to a sharp reversal in oil prices.
As the Fed approaches its 2% inflation goal, there are concerns that price pressures may not be temporary, leading to a narrative of higher rates for a longer period.
The latest Fed meeting minutes revealed that “almost all” officials believed it would be appropriate to pivot “at some point” this year. However, recent inflation data has changed market expectations.
Richard Flynn of Charles Schwab remarked, “It’s often said that the Fed takes the escalator up and the elevator down when setting rates. But for the path downwards in this cycle, it looks like they will opt for the stairs.”
The Fed minutes also indicated that policymakers generally favored slowing the pace of shrinking the asset portfolio by approximately half.
The S&P 500 fell to around 5,160, while US two-year yields surged by 23 basis points to 4.97%.
The dollar experienced its most significant jump since January, and a weak $39 billion sale of 10-year bonds further boosted yields.
Brent crude oil prices surpassed $90 per barrel, and the yen dropped below a level that Wall Street has cautioned could prompt Japan to intervene in the market.
