Wall Street falls after inflation data in the US: what the market expects from the Fed

For its part, the core CPI, excluding food and energy, moderated to 5.6% from 5.7%, although consensus expected a fall to 5.5%.

In monthly termsthe rise in the general CPI was 0.5%, in line with expectations, which represents an acceleration from the 0.1% in December, while the core rate rose by 0.4%, also in line with the consensus expectations.

In this context, the New York stock market falls up to 1% hand in hand with the Dow Jones at 0.5% to 34,067.38 points, followed by the Nasdaq Composite at 0.4% at 11,842.36. Finally, the S&P500 fell 0.2% to 4,123.87 points.

US Treasury yields rose on Tuesday after the release of the latest Consumer Price Index (CPI) data. After a choppy start to the session, the 10-year bond yield was trading at 3.726%, its highest level since January 3, reflecting market expectations that the Fed will keep interest rates higher for longer.

The yield on two-year notes, especially sensitive to rate hike expectations, rose to 4.583%, its highest since early November.

The yield curve between the two-year and 10-year notes inverted further, at -86 basis points, after declining to -88 basis points last week.

Futures rose as investors expect the Fed rate to peak at 5.243% in July. For December, the market puts it at 5.008%, more than 50 basis points above the level before last month’s strong jobs data, which stoked fears of further tightening.

What does the market expect from the Fed?

The experts of Oxford Economics believe that the inflation data it won’t sit well with the fed. “It was stronger than we expected, and this, along with the tight labor market and the net easing in financial market conditions, may warrant a change in our forecast for the federal funds rate. Our subjective odds for Additional cumulative 50 basis points in Fed rate hikesplacing the terminal rate this cycle at 5.25%would be broadly consistent with the expectations of the financial market,” they indicate.

For Neal Keane, head of sales operations at the international brokerage ADSS, “The Fed’s fight against inflation has hit some roadblocks in its attempt to get closer to its 2% inflation target”, and the publication of this report coupled with the strength of the labor market “will raise questions at the Fed’s Monetary Committee meeting next month. The current expectation is for another 25bp increase in interest rates, given their signal that the fight against inflation is far from over, increases above 25bp cannot be ruled out,” he adds.

John Leiper, chief investment officer at Titan Asset Management, notes that “after a strong month of January, US stocks have hit resistance recently and may struggle from here, as market participants digest the data and recalibrate expectations. In general, wherever rates peak, markets will need to shift their attention from the magnitude of further rate increases to the reality that rates will remain elevated for some time“.

For Tom KremerSenior Strategist at Quintet Private Bank, “US inflation continues to trend downward, but as recent revisions and today’s CPI report have made clear, the fall may not come as quickly and smoothly as the markets had come to anticipate in recent months.”

“While today’s data was somewhat disappointing to those hoping for a quick normalization of inflationary pressures, we don’t think it will fundamentally change the Federal Reserve’s outlook. We expect the fed funds rate to peak just above 5% in the spring, followed by a long pause.“, considers.