Mid-day: Rate hike fears keeps edging markets

The stock market is struggling to overcome weakness induced by the hot Consumer Price Index (CPI) report and its implications for monetary policy. The S&P 500 started the session down 1.3%, then peaked above its flat line, and is now down 0.9% in midday action.

The Dow Jones Industrial Average (-0.7%) and Nasdaq Composite (-0.9%) have followed similar price action. The Russell 2000, however, trades higher by 0.9% after being down 1.7% intraday.

Briefly, total CPI increased 0.6% month-over-month in January (Briefing.com consensus 0.5%), and so did core CPI (Briefing.com consensus 0.5%), which excludes food and energy. On a year-over-year basis, they were running extremely hot at 7.5% and 6.0%, respectively.

The knee-jerk selling pressure was attributed to fears that the Fed would be forced to hike rates more aggressively. Indeed, the CME FedWatch Tool is currently pricing in a 75.3% probability for a 50-basis-point hike in March, versus 24.0% yesterday, and Saint Louis Fed President Bullard (FOMC voter) said he’s open to larger rate hikes and wants full-point increase by July 1.

The latter comments from Mr. Bullard have triggered some mechanical selling activity in recent action. Eight of the 11 S&P 500 sectors are currently trading lower, including the utilities (-2.0%) and information technology (-1.5%) sectors at the bottom of the standings.

Conversely, the materials (+0.7%), energy (+0.3%), and financials (+0.2%) sectors are trading in positive territory. Energy stocks remain supported by persistently high oil prices ($91.27, +1.61, +1.8%), which are feeding into inflation pressures/expectations.

Besides the data, the market is contending with a sharp increase in interest rates. The 10-yr yield has broken above 2.00% with an 11-basis-point increase to 2.04%. The 2-yr yield has jumped 20 basis points to 1.55% on increased rate-hike expectations. The U.S. Dollar Index is down 0.2% to 95.30.

Earnings reports have taken a backseat in terms of the trading narrative, but plenty of companies continued to pull through with better-than-expected results, including Walt Disney (DIS 153.89, +6.64, +4.5%) and Coca-Cola (KO 62.17, +1.12, +1.8%).

Reviewing today’s economic data:

  • Total CPI increased 0.6% month-over-month in January (Briefing.com consensus +0.5%) on the heels of an upwardly revised 0.6% (from 0.5%) for December. Core CPI, which excludes food and energy, was also up 0.6% month-over-month (Briefing.com consensus +0.5%) after increasing 0.6% in December. On a year-over-year basis, total CPI is up 7.5% – the highest since February 1982 – and core CPI is up 6.0% – the highest since August 1982.
  • The key takeaway from the report should be obvious: the inflation picture is getting worse, making it clear yet again that the Fed is behind the curve in fighting inflation.
  • Initial jobless claims for the week ending February 5 decreased by 16,000 to 223,000 (Briefing.com consensus 234,000) while continuing claims for the week ending January 29 held steady at 1.621 million.
  • The key takeaway from the report is that it shows the labor market is back in a tighter spot with the peak of Omicron constraints having passed, and that may very well be a harbinger of ongoing wage inflation pressures for employers.
1 Like