[New York Stock Market] Index Pressured by Inflation... Treasury Yields Reach Highest in Over Two Months

The three major indices of the U.S. New York stock market all closed lower on the 13th (local time) as hotter-than-expected inflation dampened expectations for an interest rate cut. As the market's forecast for a rate cut shifted to June or July, U.S. Treasury yields rose amid expectations of prolonged high interest rates. The 10-year yield climbed to 4.32%, and the 2-year yield reached 4.66%, marking the highest levels since November and December of last year, respectively. In particular, the 2-year yield, which is sensitive to monetary policy, surged to a level just before the Fed hinted at a pivot at the Federal Open Market Committee (FOMC) meeting in December last year.

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On that day at the New York Stock Exchange (NYSE), the blue-chip-focused Dow Jones Industrial Average fell 524.63 points (1.35%) from the previous session to close at 38,272.75. It dropped more than 500 points in a single day, marking the largest decline in 11 months since March last year. The large-cap S&P 500 index fell 68.67 points (1.37%) to 4,953.17, falling below the 5,000 mark. The tech-heavy Nasdaq index closed down 286.95 points (1.8%) at 15,655.6.

The U.S. January Consumer Price Index (CPI) rose above market expectations, significantly worsening investor sentiment and triggering sell-offs. The U.S. Department of Labor reported that the January CPI increased by 3.1% year-over-year. This exceeded the expert forecasts of 2.9% compiled by Bloomberg News and The Wall Street Journal (WSJ). Month-over-month, the CPI rose 0.3%, surpassing the expected 0.2%.

The core CPI, excluding energy and food, rose 3.9% year-over-year and 0.4% month-over-month. These figures also exceeded market expectations of 3.7% and 0.3%, respectively. The 0.4% month-over-month increase in core CPI was the largest since May last year, marking an eight-month high.

Rising housing costs, food prices, auto insurance, and medical expenses pushed the CPI higher. Housing costs, which account for 35% of the CPI weighting, rose 0.6% month-over-month and 6% year-over-year. Two-thirds of the January CPI increase was due to housing costs. Along with housing, service prices rose 0.7% month-over-month and 5.4% year-over-year. Food prices also increased 0.4% month-over-month and 2.6% year-over-year.

Thorsten Slok, chief economist at Apollo Global Management, analyzed, "(The Fed) is still too early to declare victory over inflation," adding, "The last mile?the final stretch before reaching the target?might actually be more difficult." Christina Hooper, chief global market strategist at Invesco, said, "The Fed will likely need more data to feel comfortable before cutting rates," and "Progress is being made, but it is not happening as quickly as the Fed would like."

The market had expected the January CPI inflation rate to fall into the 2% range for the first time in 2 years and 10 months since March 2021, but this forecast was missed, pushing the expected timing of rate cuts from May back to June or July. Initially, the market favored a rate cut in March, but after last month's FOMC meeting, the forecast shifted to May, and with this CPI release, it has retreated once more. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market now reflects a 51% probability that the Fed will begin cutting rates in June, up from 41% the previous day. The chance of a first rate cut in July jumped over 20 percentage points to 35%. Conversely, the probability of a rate cut starting in May fell from 52% to 32%.

Derek Tang, monetary policy analyst at LH Meyer, commented on the rate cut timing outlook, saying, "The tendency to skip March has strengthened, and there is now a temptation to push the cut to June," adding, "Since Chairman Powell mentioned that the inflation path will be challenging, officials will not be surprised by a single increase, but the data today does not help alleviate concerns about inflation rising above the target."

The market's next focus is on the January Personal Consumption Expenditures (PCE) price index, scheduled for release on the 29th. The Fed considers the core of inflation to be in the services sector and places more importance on the PCE price index, which has a lower weighting for housing costs. The core PCE price index for December last year rose 2.9% year-over-year, falling into the 2% range for the first time in 2 years and 9 months since March 2021. The January core PCE price index, to be announced at the end of this month, is expected to partially reflect the CPI inflation rate.

Government bond yields are rising amid expectations of prolonged high interest rates. The U.S. 10-year Treasury yield, a global bond yield benchmark, is trading at around 4.32%, up 15 basis points (1 bp = 0.01 percentage points) from the previous trading day. This is the highest level since November 30 last year (4.33%). The 2-year U.S. Treasury yield is moving around 4.66%, up 19 basis points, trading at the highest level since December 12 last year (4.73%), just before the Fed hinted at three rate cuts this year.

By individual stocks, JetBlue soared 21.58% after activist investor Carl Icahn confirmed a 10% stake in the company. Toy maker Hasbro fell 1.35% after its fourth-quarter earnings missed market expectations. U.S. car rental company Avis Budget Group also dropped 22.9% amid disappointment over its earnings.

International oil prices are rising due to Middle East tensions, but the increase is limited as the Fed's rate cut timing is pushed back. West Texas Intermediate (WTI) crude oil rose $0.95 (1.24%) to $77.87 per barrel. Brent crude oil traded up $0.77 (0.94%) at $82.77 per barrel.

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