Markets plummet as likelihood of June rate cut dissipates

MANHATTAN (CN) — Investors suffered a huge setback this week as the latest inflation report shows inflation hasn’t gone anywhere and interest rate cuts are not on the horizon.

Losses began to trickle in earlier this week, but after the consumer price index came out Wednesday they began to pile up. The carnage accelerated Friday and by the closing bell the Dow Jones Industrial Average lost a whopping 1,824 points, the S&P 500 declined 131 points, and the Nasdaq shed 204 points.

The U.S. Bureau of Labor Statistics’ consumer price index showed inflation rose by 0.4% last month, with a 3.5% annualized headline inflation rate for the last 12 months. Analysts had predicted — or, perhaps more accurately, hoped for — a 0.3% monthly increase and a 3.2% annualized rate.

This marks the third CPI report in a row to come in hotter than anticipated, a fact not lost on investors. Equities plunged after the news, as it almost certainly kills all hope for a June interest rate cut from the Federal Reserve.

“Goldilocks has left the building,” Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance, said. “Inflation isn’t coming down anymore and rate cut hopes are going to be pushed off even further into the future.”

Worse still, Zaccarelli notes, if inflation data remain sticky later into the year the Fed may cut rates by only 25 basis points in total for 2024. “The Fed can look past any one report, but as we continue to see multiple reports in a row that are higher than expected, it becomes more difficult for the Fed to advocate cutting rates any time soon,” he said.

More than half of the increase in the CPI print came from gasoline prices and rent, the first of which is extremely volatile and the latter of which typically lags compared with other inflationary trends.

Fortunately, on Thursday the bureau's producer price index — which measures the change in prices among manufacturers and other companies — showed prices gained just 0.2% in March, with a 2.1% annualized inflation rate. Core PPI, which excludes energy and food prices, came in even lower at 0.1% for March.

The lower-than-forecast PPI provided a minor salve to the pain in equities resulting from the CPI report, but it helped Treasury yields fall back somewhat.

Larry Tentarelli, president of the Blue Chip Daily Trend Report, said that though the PPI numbers were good, “we believe that investors should be prepared for fewer Fed rate cuts this year, one or two, and for a first potential rate cut not until the July meeting.”

Tentarelli also noted a lot depends on future employment reports. “If the jobs market data starts to crack, either through higher unemployment and jobless claims or much lower-than-forecast payrolls, any of these factors could move up the Fed timeline,” he said.

Sentiment from the business community and consumers has also taken a hit. The National Federation of Independent Business monthly survey released on Tuesday dipped lower for its third consecutive month, while on Friday the preliminary reading of consumer sentiment from the University of Michigan reported a similar decline while inflationary expectations ticked up.

The preliminary Michigan report noted that consumers have “some frustration that the inflation slowdown may have stalled.”

Follow @NickRummell

Subscribe to Closing Arguments

Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.

Email *

Submit