Inflation Data Prompts Stocks To Fall

It seems unlikely that the Fed will cut rates later this year based on recent data.

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There was a pullback in U.S. stock prices on Friday, resuming a spell of selling after an inflation gauge favored by the Federal Reserve showed more price pressures than expected.

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In addition to the S&P 500, the Nasdaq Composite, which is dominated by technology, fell 1.8%, and the Dow Jones Industrial Average, which is made up of blue chips, fell 1.3%.

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In spite of modest gains on Thursday, all three indexes are on track to end the holiday-shortened week in the red, despite the moves.

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The stock market in the United States has been fluctuating this month. The robust economic data, while being positive for the outlook for growth, have raised concerns that the Fed will be able to hold interest rates steady at higher levels for a longer period of time to ensure inflation stays under control. 

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There are signs of a hot economy that is leading some investors to give up on the idea that the Fed will be quick to lower interest rates once it has finished raising them, according to David Donabedian, chief investment officer at CIBC Private Wealth US.

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“There has been a dramatic change in the way people perceive the monetary policy and where it is heading," said Mr. Donabedian. "What's currently priced in is more realistic than what people were pricing in right after the Fed meeting" which ended Feb. 1, according to him.

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There is another worry, however, as the January personal consumption expenditures price index exceeded economists' expectations, which adds to the worries. Among the core readings, which exclude food and energy, the core reading was 4.7% higher year-on-year, which is considered by the Fed to be the best gauge of inflation. Compared to consensus expectations for a 4.4% increase, that was well ahead of the actual result.

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U.S. government bond yields rose. The yield on the benchmark 10-year Treasury note increased from 3.879% to 3.939% on Thursday. A fall in bond prices leads to a rise in bond yields.

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Investors are growing more hopeful that the Fed can control inflation without causing too much economic damage as the economy has proved more resilient to higher interest rates than many had expected.

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“There are no Goldilocks in the market, but if we can get an environment where growth holds up, as it has been so far; inflation continues to come down; and the Fed can ease up the interest rate, that is an ideal environment,” said Brian O'Reilly, head of the market strategy at Mediolanum International Funds.

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After Boeing halted deliveries of its 787 Dreamliner jets due to a documentation issue, its stock fell 3.5%.

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A share price decline of 2.8% was reported by Warner Bros. Discovery after the entertainment giant's quarterly revenue missed expectations and its chief executive warned that the U.S. ad market remains very challenging for the company.

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Brent crude futures slipped 1.1% to $81.28 a barrel in front-month contracts this week. There has been a sharp drop in the international benchmark oil price this month due to a rise in U.S. crude inventories which has prompted concerns that oil demand could be slowing in the world's largest economy. 

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A mixed picture was seen overseas, with Asian indexes. After the nominee for the helm of the Bank of Japan stated that the inflation rate, which has reached its highest level in four decades, will soon fall without an increase in interest rates, the Nikkei 225 rose 1.3%. Meanwhile, the Hang Seng Index in Hong Kong dropped 1.7%, while the Shanghai Composite Index in China dropped 0.6%.

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Markets in Europe were generally lower. About 0.8% of the Stoxx Europe 600 fell on the pan-continental scale.