U.S. stocks plunge as inflation data dampens hopes of rate cuts
U.S. stocks experienced a sharp decline on Tuesday after the release of worse-than-expected inflation data, causing investors to question the optimistic outlook that had propelled Wall Street to record-breaking highs. In early trading, the S&P 500 dropped 1.3% as traders pushed back their predictions for when the Federal Reserve will implement interest rate cuts. The report on higher-than-anticipated inflation may have dashed hopes that the first cut could arrive in March. The Dow Jones Industrial Average fell 420 points, or 1.1%, from its previous record, while the Nasdaq composite sank even further, losing 1.8%.
Companies specialized in high-growth sectors, particularly technology, were hit hard by the news. Microsoft and Nvidia saw drops of 2.3% and 2.1% respectively, significantly weighing down the market. Smaller firms also suffered as concerns grew that high interest rates might limit their ability to raise funds. These worries caused the Russell 2000 index, which tracks smaller stocks, to plummet by 3%.
Some analysts warned that the inflation data could result not only in rate cut delays but also in the possibility of further interest rate hikes by the Federal Reserve. The central bank has already increased its main interest rate to the highest level since 2001, driven by efforts to curb high inflation. However, this is just one data point in a series of positive trends that have shown signs of easing inflation for several months. “Until proven otherwise, the longer-term cooling inflation trend is still in place,” reassured Chris Larkin, managing director of trading and investing. “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 bond market experienced a surge in yields as traders began to anticipate that the central bank will maintain high interest rates for a longer period. The 10-year Treasury yield increased to 4.25% from 4.18%, while the two-year yield, which is more closely tied to expectations for changes in interest rates, jumped to 4.57% from 4.47%.
Despite the unexpected inflation report, the most likely outcome still points to the possibility of a soft landing for the economy, avoiding a painful recession while inflation continues to cool in line with the Federal Reserve’s desired 2% target. However, there are still risks that conditions could swing to either extreme: either the economy enters a recession due to the weight of high interest rates or inflation accelerates again as a result of the already substantial increases in stock prices and the declining Treasury yields, which are largely attributed to the anticipated rate cuts.
The recent readjustment among traders regarding rate cuts has actually brought Wall Street’s expectations closer to what the Federal Reserve has been signaling. Fed officials are generally anticipating three rate cuts this year as they hope inflation continues to cool to the desired target.
Critics have long cautioned that stock prices may have surged too quickly, given the risks of a reacceleration in inflation and an economic slowdown. On a positive note for the markets, more companies than usual have been surpassing analysts’ profit forecasts for the latest quarter.
Arista Networks recently joined the ranks of companies beating expectations after reporting stronger-than-expected earnings and revenue for the quarter. However, its stock still fell 4.8%. Analysts speculated that investors may have been expecting an even stronger outlook for the company’s upcoming results, which caused the stock to rise nearly 20% so far this year.
Stock markets across Europe also experienced declines, while in Asia, Japan’s Nikkei 225 saw a 2.9% jump and South Korea’s Kospi gained 1.1%.
Analyst comment
Negative news: U.S. stocks plunge as inflation data dampens hopes of rate cuts
Short analysis: The release of worse-than-expected inflation data caused a sharp decline in U.S. stocks. Investors pushed back predictions for rate cuts, impacting high-growth sectors and smaller firms. There are concerns that the inflation data could lead to further interest rate hikes. However, the overall expectation is still a soft landing for the economy, avoiding recession. The readjustment in rate cut expectations brings them closer to what the Federal Reserve has been signaling.
