A very small difference between the projections in the official statistics and the… reality inflammation In January, it managed to trigger a strong liquidation wave Wall Street It almost became a panic. The worries led to sharp losses in the major indexes, which exceeded 2.4% for the Nasdaq, and a big rise in the VIX fear index.
With inflation looking more stubborn than expected and May (and perhaps even June) too late for the Fed to cut rates for the first time since 2020, investors decided to take profits after a series of record highs.
The question Did the mood in the markets turn sour after yesterday or not… wrong guess for inflation? Is the artificial intelligence craze over? Or are equity markets about to undergo a necessary — if unwelcome — correction before continuing their frenzied march to new highs?
First, let's be clear that the inflation data is not bad enough to warrant panic. Instead of rising 0.2% in January, compared to December, as expected, prices rose 0.3%, and instead of weakening to 2.9% year-over-year, the consumer price index was 3.1% from 3.9% in December. Finally, headline inflation was steady at 3.9%. So, Janet Yellen was quick to clarify that the data are not catastrophic, not confirming pessimistic forecasts of falling inflation and recession.
But the Persistence of inflammation It takes a toll on the psychology of investors. With the headline price index holding above 3% and structural inflation steady, the central bank is not talking about cutting interest rates. It is now clear that the index needs to stabilize below 3% and on a downward trajectory before the first reduction is on the table.
However, it was observed stocks of Investors. Immediately after the data was released, the FedWatch tool went “crazy.” The probability that interest rates will not be cut even in May has risen to 65%. In March, they are almost certain to remain unchanged with a probability of more than 90%, while investors are giving a 26% chance that there will be no cut even in June, which until a few weeks ago they believed was June interest rates. Rates will be cut to 4.75%-5.00% from 5.25%-5.50% today.
The US bonds The 10-year yield rose to 4.3% and came under strong pressure, while the dollar index rose to a three-month high. The Dow Jones lost more than 700 points, before its biggest one-day percentage decline since December 2022 … The S&P 500 … fell sharply from last week's 5,000-point victory, but the Nasdaq was the hardest hit.
Having reached such highs through an impressive rally that began in November and lasted with little pause until today, investors have become particularly sensitive to negative news. Yesterday's drop is not surprising as the data shows that the war on inflation is far from over, essentially reversing the process of the economy's steady descent.
This is very likely in the next few days buy to do to recover, After “digesting” the new data, but in any case, inflation will determine the trend of interest rates and expectations of lowering interest rates are the main catalyst for the trend of the markets today.
A A confident assessment The situation comes from the capitalist economy. According to him, yesterday's data for January is not capable of changing the general trend of inflation. Price pressures have leveled off and structural PCE (Personal Consumption Expenditure Index) will be around 2% in the summer. This is an indicator that the central bank is focused on and if the capital economy forecast is confirmed, interest rate cuts will not be delayed.