Fed-Pivot Rethink and War Jitters Hit the S&P 500 – US Market Wrap

Wall Street traders sold stocks and bonds after another strong inflation report indicated that the Federal Reserve will not cut interest rates this year. Oil rose as geopolitical tensions resurfaced.

Equities extended their April losses, with the S&P 500 falling about 1% as the consumer price index outperformed expectations for the third month. In a hawkish reprice of the Treasury curve, 10-year yields are above 4.5%, and Fed swaps now show bets on only two rate cuts in 2024. A sharp drop in oil prices weighed on sentiment, with news reports stating that the US and its allies believe Iran or its proxies are about to launch major missile or drone strikes on Israel.

Price pressures may not be just a “bump in the road” as the Fed rides the “last mile” towards its 2% inflation goal, with the higher-for-longer rate narrative taking hold. According to the minutes of the most recent Federal Reserve meeting, “almost all” officials believe it is appropriate to pivot “at some point” this year. However, since then, inflation has upended market bets.
The Fed minutes also revealed that policymakers “generally favoured” slowing the rate at which they are reducing the asset portfolio by roughly half.

The S&P 500 fell to around 5,160. Treasury two-year yields rose 22 basis points, to 4.97%. The dollar made its biggest gain since January. A weak $39 billion sale of 10-year bonds also contributed to higher yields. Brent crude prices have risen back above $90.

The March core consumer price index, which excludes food and energy costs, rose 0.4% from February, according to government data released on Wednesday. It increased 3.8% from a year ago, maintaining its previous month’s performance.