To The Moon

Yesterday's hotter-than-expected March inflation report sent shockwaves through the market, prompting a significant decline in stocks amidst fears of prolonged interest rate hikes by the Federal Reserve.

Inflation

Market Reaction

• Stock Decline: All three major indices closed in negative territory, with the Dow Jones Industrial Average leading the losses with a 1.1% decline. The $S&P 500(.SPX)$ and $NASDAQ(.IXIC)$ also recorded losses of nearly 1% and 0.8%, respectively.

• $Tesla Motors(TSLA)$ $NVIDIA Corp(NVDA)$ $Apple(AAPL)$ $Advanced Micro Devices(AMD)$

Stocks

• Bond yields spiked sharply, marking the largest one-day increase since September 2022, with the 10-year yield rising by 0.19 percentage points to 4.559%.

• Revised Rate Cut Expectations: Economists and strategists have revised their expectations regarding the timing and frequency of interest rate cuts by the Federal Reserve. Some analysts, such as those from AllianceBernstein and RBC, now anticipate only one rate cut this year, likely in December. The odds of a June rate cut, previously high, plummeted throughout the day, with the CME FedWatch Tool indicating a mere 16.5% chance by the end of trading.

• FOMC Minutes: The release of minutes from the latest Federal Open Market Committee (FOMC) meeting revealed a general consensus among members regarding the need to slow the pace of balance sheet reduction. Additionally, most officials agreed on the necessity of lowering borrowing costs "at some point" this year. However, recent inflation data has disrupted expectations for multiple rate cuts in 2024.

Implications

• Persisting Inflationary Pressures: March's consumer-price index rose by 3.5% year-over-year, surpassing economists' forecasts and indicating a pickup from February's levels. Core prices, excluding food and energy categories, also experienced higher-than-expected increases. These stubborn inflationary pressures challenge the case for immediate interest rate cuts and raise concerns about achieving rate cuts without signs of an economic slowdown.

Inflation

• Fed's Balancing Act: Federal Reserve policymakers are faced with the challenge of navigating through persistent inflation while balancing the need for interest rate adjustments to support economic growth. The minutes from the March FOMC meeting highlighted a cautious approach to balance sheet reduction and interest rate changes, emphasizing the importance of data-driven decision-making.

Conclusion

In conclusion, yesterday's inflation report significantly impacted market sentiment, leading to a decline in stocks and reshaping expectations regarding Federal Reserve policy.

The surge in inflationary pressures has raised doubts about the feasibility of immediate rate cuts and underscores the complexity of the Fed's task in managing monetary policy amidst evolving economic conditions.

Investors will continue to monitor economic data and central bank communications for further insights into the trajectory of interest rates and market dynamics with earning’s calendar (friday).

Investors will be watching the ECB rate decision and US March PPI Thursday as the latest macro indicators land. We will also see Italy industrial production and Russia’s gold and FX reserves. And the long list of central bank speakers includes the Riksbank’s Jansson, the ECB’s Lagarde and the BOE’s Greene as well as the Fed’s Williams, Barkin, Collins and Bostic.

The information provided in this recap is for informational purposes only and should not be construed as financial advice. Investing in the stock market involves inherent risks, and individuals should conduct thorough research and seek professional guidance before making investment decisions. The author does not guarantee the accuracy or completeness of the information provided, and any reliance on this information is at the reader's own risk.

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