(Bloomberg) — Asian stocks are set to slide after hotter-than-estimated US inflation data triggered a selloff on Wall Street. Australian and New Zealand bonds dropped in early trading.
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Equity futures pointed to declines of more than 1% in Tokyo and Sydney after the US consumer price index topped estimates across the board, leading the S&P 500 and Nasdaq 100 to drop from near all-time highs. Two-year Treasury yields surged to levels not seen before the December central bank “pivot” while the dollar approached a three-month high. Australian 10-year yields climbed 10 basis points.
The Golden Dragon index of US-traded Chinese companies fell 2.7%, its biggest decline in almost a month, as trading is set to resume in Hong Kong but China remains closed for Lunar New Year holidays. Swap traders ratcheted down their expectations for a Fed cut before July while the stock market’s “fear gauge” — the VIX — surged the most since October.
“Today’s CPI report caught a lot of people off guard,” said Chris Zaccarelli at Independent Advisor Alliance. “Many investors were expecting the Fed to begin cutting rates and were spending a lot of time arguing that the Fed was taking too long to get started – not appreciating that inflation could be sticky and not continue down in a straight line.”
The CPI data came as a disappointment for investors after a recent downdraft in price pressures that helped build expectations for rate cuts this year. The numbers also gave credence to the wait-and-see approach highlighted by Jerome Powell and a chorus of Fed speakers.
“If Powell and other Fed members hadn’t already thrown cold water on the prospects for a March rate cut a few weeks ago, today’s CPI report might have done that,” said Jason Pride at Glenmede. “Evidence of still-sticky services inflation is likely to give the Fed pause before cutting rates too quickly.”
Pride says rate cuts are likely still on the table for this year, but they could begin later than the market may be anticipating.
Swap contracts referencing Fed policy meetings — which as recently as mid-January fully priced in a rate cut in May and 175 basis points of easing by the end of the year — were roiled. The odds of a May cut dropped to about 32% from about 64% before the inflation data, with fewer than 90 basis points anticipated this year.
“While the door for a March cut had already been effectively shut given the recent Fed commentary and the jobs reports, the Fed has now locked the door and lost the key,” said Greg Wilensky at Janus Henderson Investors.
Zaccarelli at Independent Advisor Alliance noted that the January CPI is only one month’s report and if there’s a decline in inflation in February, then this will have been just a “bump in the road.” However, if there is a new pattern of inflation stalling out at current levels — or increasing from here — then the stock market has further to fall, he said.
Andrew Brenner at NatAlliance Securities expects more volatility for the rest of the week “as the bears have the upper hand and the bulls are grasping.”
To Jeffrey Roach at LPL Financial, while the data wasn’t exactly what the Fed wanted to see, investors will have to wait until later this month for a more comprehensive look at consumer prices.
“Just as the Fed said it wouldn’t rush to cut rates even after several months of encouraging economic data, they’re not going to immediately reverse course just because of one hotter-than-expected CPI reading,” said Chris Larkin at E*Trade from Morgan Stanley. “Until proven otherwise, the longer-term cooling inflation trend is still in place. The Fed had already made clear that rate cuts weren’t going to happen as soon as many people wanted them to. Today was simply a reminder of why they were inclined to wait.”
The surprise jump in the January consumer price index probably will be less pronounced in the Fed’s preferred inflation gauge and potentially less alarming to central bank officials as they weigh when to cut interest rates. Based on the latest CPI figures, the personal consumption expenditures price index excluding food and energy — due from the Bureau of Economic Analysis on Feb. 29 — probably rose 0.29% last month, Morgan Stanley economists said.
“The CPI data has disrupted the string of Goldilocks growth and inflation data that had helped to lift the S&P 500 over 5,000,” said Brian Rose at UBS Global Wealth Management. “But it doesn’t change our positive fundamental outlook for 2024 of solid growth, further disinflation, and the start of Fed rate cuts in Q2 that is supportive of risk assets.”
In other markets, gold dipped below $2,000 an ounce for the first time since December following the diminished hopes for a rate cut while Bitcoin held near its $50,000 milestone. Oil shrugged off most of the risk-off sentiment, with US benchmark West Texas Intermediate posting a seventh day of gains thanks to bullish demand from OPEC.
Key Events this Week:
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Eurozone industrial production, GDP, Wednesday
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BOE Governor Andrew Bailey testifies to House of Lords economic affairs panel, Wednesday
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Chicago Fed President Austan Goolsbee speaks, Wednesday
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Fed Vice Chair for Supervision Michael Barr speaks, Wednesday
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Japan GDP, industrial production, Thursday
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US Empire manufacturing, initial jobless claims, industrial production, retail sales, business inventories, Thursday
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ECB President Christine Lagarde speaks, Thursday
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Atlanta Fed President Raphael Bostic speaks, Thursday
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Fed Governor Christopher Waller speaks, Thursday
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ECB chief economist Philip Lane speaks, Thursday
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US housing starts, PPI, University of Michigan consumer sentiment, Friday
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San Francisco Fed President Mary Daly speaks, Friday
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Fed Vice Chair for Supervision Michael Barr speaks, Friday
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ECB executive board member Isabel Schnabel speaks, Friday
Some of the main moves in markets:
Stocks
Currencies
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The Bloomberg Dollar Spot Index rose 0.6%
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The Japanese yen was little changed at 150.77 per dollar
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The Australian dollar was little changed at $0.6454
Cryptocurrencies
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Bitcoin fell 0.2% to $49,482.97
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Ether fell 0.2% to $2,628.47
Bonds
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The yield on 10-year Treasuries advanced 14 basis points to 4.31%
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Australia’s 10-year yield advanced 10 basis points to 4.27%
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New Zealand’s 10-year yield rose 7 basis points to 4.9%
Commodities
This story was produced with the assistance of Bloomberg Automation.
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