Markets Jolted as The Fed’s ‘Last Mile’ Appears Elusive – US Market Wrap

Wall Street received a reality check on Tuesday, as higher-than-expected inflation data triggered a drop in both stocks and bonds.

Equities retreated from their all-time highs after the consumer price index exceeded expectations across the board. Treasuries fell, with two-year yields reaching their highest level since before the December central bank “pivot.” Swap traders lowered their expectations for a Fed cut before July. The “fear gauge” of the stock market, the VIX, has risen the most since October. In addition, a measure of perceived risk in the US investment-grade corporate bond market rose, with three issuers being sidelined.

The CPI data disappointed investors after a recent drop in price pressures, which fueled expectations for rate cuts this year. The data also supported the wait-and-see approach advocated by Jerome Powell and a chorus of Fed speakers.

The S&P 500 fell 1.4%, falling below 5,000 on the worst CPI day since September 2022. Rate-sensitive stocks fell, including homebuilders and banks, while Tesla Inc. led megacap losses. The Russell 2000 index of small-cap stocks fell by about 4%. US 10-year yields rose 14 basis points to 4.31%. The so-called real yield reached 2%. The dollar rose, pushing gold below $2,000.

Swap contracts referencing Fed policy meetings, which as recently as mid-January fully priced in a May rate cut and 175 basis points of easing by the end of the year, were roiled. The odds of a May cut fell to about 32% from around 64% before the inflation data, with fewer than 90 basis points expected this year.