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  • Writer's pictureThe San Juan Daily Star

Wall St sinks as hot inflation data dampens early rate-cut hopes

Wall Street’s main indexes tumbled on Tuesday after a higher-than-expected consumer inflation reading pushed back market expectations of imminent interest rate cuts, driving U.S. Treasury yields higher.

A Labor Department report showed U.S. consumer prices increased above forecasts in January amid a surge in the cost of shelter.

“Many Federal Reserve governors have come out in the last couple of weeks and given various indications that the cuts expected by the market in the first half of the year may have been premature. Now the CPI data are certainly reaffirming that picture,” said Bob Elliott, chief investment officer at Unlimited Funds.

Markets have rallied this year on bets that the Fed would start trimming rates in May. The S&P 500 closed above 5,000 for the first time on Friday. The Dow is also trading at a record-high level, and on Monday the Nasdaq briefly surpassed its record closing high from November 2021.

After the release of the inflation data, bets by traders for a rate reduction in May of at least 25 basis points dropped to 38%, from about 58% before the data, while expectations for June stood at 75%, the CME FedWatch tool showed.

Rate-sensitive megacaps like Microsoft, Alphabet, and Meta Platforms lost between 0.8% and 2.1%, as yields on U.S. Treasury notes across the board spiked to two-month highs. [US/]

Most chip stocks such as Micron Technology, Qualcomm and Broadcom dropped between 1.7% and 4.8%, sending the Philadelphia SE Semiconductor index down 2.2%.

Real estate and utilities led losses among the 11 major S&P 500 sector indexes, with real estate falling to an over two-month low.

The small-cap Russell 2000 index also shed 3.2%, on track for its worst day in nearly a year.

“Today, market sentiment is getting a reality check and you just cannot escape the fact that the Fed may have to be more cautious,” said Lara Rhame, chief U.S. economist at FS Investments.

The latest data comes on the heels of a modest revision to inflation in the last quarter of 2023 that left investors briefly relieved on the trajectory of inflation.

The Cboe volatility index, a market fear gauge, hit its highest level since November.

At 1:51 p.m. EST, the Dow Jones Industrial Average fell 594.28 points, or 1.53%, to 38,203.1, the S&P 500 lost 73.41 points, or 1.46%, to 4,948.43 and the Nasdaq Composite lost 277.76 points, or 1.74%, to 15,664.78.

Among top movers, JetBlue Airways jumped 19.4% after activist investor Carl Icahn reported a 9.91% stake, adding that the carrier’s stock is “undervalued.”

Arista Networks shed 4.2% after the cloud solutions provider forecast current-quarter adjusted gross margin below expectations, while Marriott International lost 6.4% after the hotel operator forecast annual profit below Street expectations.

Software firm Cadence Design Systems dropped 4.4% following a bleak quarterly sales forecast, while toymaker Hasbro lost 2.7% after a steeper-than-expected drop in holiday-quarter sales and profit.

Tripadvisor jumped 14% as the online travel agency formed a special committee to evaluate deal proposals.

Declining issues outnumbered advancers for a 9.6-to-1 ratio on the NYSE and a 4.6-to-1 ratio on the Nasdaq.

The S&P 500 posted 16 new 52-week highs and 6 new lows while the Nasdaq recorded 38 new highs and 96 new lows.

While most of the megacaps have powered higher this year, shares of Tesla have fallen 22%, the third-worst performer in the S&P 500, demonstrating how quickly the market’s superstars can fall out of favor.

Some investors believe breadth has narrowed partly because markets now anticipate the Federal Reserve will cut rates later in the year than many on Wall Street had expected, forcing an unwind of bets in rates-sensitive sectors that could benefit from lower borrowing costs.

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