Hopes that U.S. consumer inflation might cool in March blew away in the spring wind early Wednesday as the March CPI report came in hotter than expected at 0.4% for both core and headline monthly price growth. Treasury yields quickly soared to five-month highs and stocks retreated as rate cut hopes faded.
Headline and core CPI rise 0.4%, above expectations of 0.3%, sending yields to 5-month highs
Delta shares take off following strong earnings report, but Nvidia shares fall into correction mode
Expectations for tomorrow’s PPI report show analysts expect progress from February
(Wednesday market open) U.S. consumer inflation remained a sticky subject in March, rising 0.4% and failing to ease from February’s monthly growth. Treasury yields immediately went parabolic, rising sharply in reaction to the unpleasant news and creating a rough path for Wall Street Wednesday.
Approaching the report, analysts had anticipated 0.3% monthly increases in both the headline and core Consumer Price Index (CPI), Trading Economics said. Core strips out volatile food and energy. Instead, the 0.4% increases for both were the same as in February, meaning CPI has now strung together three straight months of surprising strength and could become a major impediment to the Federal Reserve’s plans to cut rates.
Hopes for a June rate cut got cut in half by today’s data, falling to 20% from above 50% yesterday according to the CME FedWatch tool.
On an annual basis, headline CPI rose 3.5%, the highest since September 2023. Core was unchanged from February at 3.8%. The monthly headline CPI has now risen 0.4% for three straight months.
The benchmark 10-year Treasury yield catapulted to 4.5% immediately after the data after trading below 4.35% earlier Wednesday, and now is at a new five-month high. The stock market quickly erased earlier gains and fell into red territory.
“With the first three months of the year all showing hot inflation, it’s tough to call it a blip anymore,” said Collin Martin, a director of fixed income strategy at the Schwab Center for Financial Research. “Supercore CPI rose 0.6% in March, while core goods prices fell modestly. In short, services inflation continues to run hot and should push back the timing of the first cut even more.”
Supercore CPI measures services minus rent and energy services.
Once this week’s inflation data comes and goes, earnings season begins. Three of the largest U.S. banks report on Friday morning, followed by several more next week. The first full week of earnings season, starting Monday, also sees health care getting into the action with earnings from Johnson & Johnson (JNJ) and UnitedHealth (UNH), along with semiconductors as ASML (ASML) chips in next Wednesday.
Futures based on the S&P 500® index (SPX) dropped 0.9% shortly before the close of overnight trading and futures based on the Nasdaq-100® (NDX) fell 1.1%. Futures based on the Dow Jones Industrial Average® ($DJI) slid 0.8%.
Wall Street’s consensus for annual March CPI growth had been 3.4% for headline CPI and 3.7% for core. Instead, headline of 3.5% and core of 3.8% failed to show signs of improvement. The headline annual rate had been 3.2% in February, with core at 3.8% that month.
Today’s data follow surprisingly solid inflation growth in January and February, but the Fed indicated seasonal factors might have kept inflation sticky early in the year. That excuse might become harder to make. Shelter and gasoline costs contributed to more than half the monthly increase in headline CPI, the Bureau of Labor Statistics (BLS) said.
For the year, investors appear to be gathering around the idea of one or possibly two rate cuts. The year began with the market anticipating six to seven.
Even before today’s inflation data, signs of cracks in the long rally began showing up. The initial signs of weakness appeared last Thursday with the SPX registering a close below its 20-day simple moving average for the first time since mid-January. The same day, the VIX posted its highest close since last October. In addition, the hottest SPX stock of Q1, Nvidia (NVDA), closed at five-week lows yesterday.
“These types of cracks may be suggesting a change in trend may be underway, perhaps signaling a 5%–10% pullback over a multi-week period may finally be manifesting in the broader market,” said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. “There’d be nothing unusual about that.” The market typically has two to three 5% consolidation moves a year but hasn’t suffered one since last October.
Here are analysts’ March Producer Price Index (PPI) expectations, according to Trading Economics:
Core data strip out volatile food and energy prices. The PPI data is due at 8:30 a.m. ET tomorrow.
Producer prices are the prices companies pay on the wholesale market. Often, wholesale price patterns show up in consumer prices several months down the road because they often determine how much companies need to raise prices or how much room they have to keep prices steady without hurting their margins. Producer price growth has generally tracked below consumer price growth recently, leading to hopes that eventually they could help cool off CPI.
When PPI gets posted and digested tomorrow, investors should have a better picture of how they’ll affect the Fed’s preferred inflation measure, Personal Consumption Expenditures (PCE) prices. The March reading on that is due later this month.
“Ultimately the print matters a little less than how the combination of CPI and PPI ‘map’ to PCE,” said Liz Ann Sonders, chief investment strategist at Schwab. “The parlor game of guessing the Fed’s start point and number of cuts is often missing any actual math of how inflation gets to the Feds’ target (some easy ‘comps’ are coming out, which makes the base effects tougher near-term).”
Comparisons to last year’s inflation growth get tougher as the year rolls along, because inflation was on the downturn most of the second half of 2023.
Many meetings: Today brings a Bank of Canada meeting and Thursday features a European Central Bank (ECB) meeting. There’s growing sentiment that the ECB might lower rates before the Fed. Investors fully price in a 25 basis point ECB trim in June, followed by two or three more later this year, Reuters reported.
Minutes ahead: This afternoon features minutes from the March Federal Open Market Committee (FOMC) meeting due out at 2 p.m. ET. Fed policy makers projected three 2024 rate cuts in their dot plot then, and the minutes might help explain the thinking behind that. Since then, several Fed speakers hinted that fewer or even no rate cuts might be appropriate if the economy continues on its current path.
Fed Chairman Jerome Powell has sounded more dovish than many others on the FOMC lately, and one Fed speaker even said last week a rate hike might be necessary if inflation doesn’t flag. However, futures trading builds in no projections yet of any rate hikes.
Another event on today’s calendar is a $39 billion 10-year Treasury note auction early this afternoon, which could have an impact on Treasury yields. Two Fed speakers wait in the wings, as well.
Boeing (BA) shares ran into more nasty weather yesterday when the company reported just 83 airplane deliveries in Q1, down from 157 in Q4, amid quality concerns. It was also down from 130 a year ago. There’s concern about airplane availability for many airlines heading into summer travel season. Meanwhile, U.S. passenger numbers have swollen to pre-pandemic levels. Get ready for possible waits at the airport ahead.
Earnings season kicks off unofficially this Friday with Q1 reports from JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC). Investors might want to watch whether they put aside more money to protect against possible bad debt and how the current rate structure affects their businesses.
Friendly skies: Before that, Delta (DAL) reported this morning and the tidings looked positive. Shares got a 4% premarket bump after the company beat Wall Street’s earnings per share (EPS) and revenue estimates. Delta also offered guidance in line with analysts’ consensus for Q2 and reaffirmed previous full-year guidance.
In a CNBC interview, Delta CEO Ed Bastian said demand is strong and business travel is accelerating. All in all, the airline’s earnings were a positive way to get the earnings ball rolling down the runway, but hundreds of S&P 500 companies report over the next few weeks.
Two of them are Constellation Brands (STZ), distributor of Corona beer and other alcoholic beverages, and CarMax (KMX). Both are expected to report tomorrow and provide insight into consumer demand for both liquor and used cars. Stay tuned.
Earnings approach with the SPX trading at a historically high 20.5 price-to-earnings (P/E) ratio, meaning earnings will have to be strong to meet the market’s built-in expectations. Companies that come up short could see their stocks punished.
Talking technicals: The hottest SPX stock of Q1 and the poster child for AI, Nvidia, closed at five-week lows yesterday. “Nvidia’s been seeing some relative weakness over the past couple of weeks and while it’s too early to say, the March 8 and March 25 peaks on the daily chart around $970 look akin to a ‘double top’ formation,” said Schwab’s Peterson.
Stocks on the move:
Tuesday in review:
Major indexes erased steep midday losses and closed flat to higher Tuesday a day ahead of the CPI report. Light volume—a factor for some time now—could help explain the wide swings. Once earnings season begins and everyone returns from spring break (isn’t it over yet?) volume might return to more normal levels.
Early today, futures traders saw 99% odds the FOMC will keep rates unchanged following its April 30 to May 1 meeting, based on the CME FedWatch Tool. Chances of a quarter-point rate cut following the FOMC meeting in June are seen at around 20%, rising to around 38.5% for the late-July meeting.
Broadening out: Earnings growth seems to be expanding beyond a handful of U.S. equities, reported Jeffrey Kleintop, Schwab’s chief global investment strategist, in his latest post. More broad-based market performance may be ahead as global manufacturing measures improve.
CHART OF THE DAY: TIED AT HIP? Nvidia (NVDA-candlesticks) was the poster child of the Q1 rally, but its chart shows signs of a double top. Shares hit an all-time intraday high of $974 on March 8 and then popped again to $967 on March 25, but sank yesterday to a five-week low. The SPX (purple line) made its last all-time high two days after that second surge by Nvidia and hasn’t been able to hold onto rallies since. Data sources: S&P Dow Jones Indices, Nasdaq. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Ideas to mull as you trade or invest
Defense on field: Tuesday’s worst performers were financials and industrials, while energy also posted a weak finish on the sector scoreboard as crude oil fell for a third straight day. Interest rate-sensitive utilities and real estate stocks again led the pack, perhaps a sign that investors hope this week’s data could help bring Treasury yields down. Whatever the reason, yesterday’s late comeback provided additional evidence of a “buy the dip” mentality, though defensive sectors led the way.
Drama lacking: Despite last Thursday’s sharp losses, dramatic swings happen about as often as total eclipses lately. The SPX hasn’t suffered a 2% or worse one-day decline since February 21, 2023, the 12th longest streak without one since 1928. For that matter, it’s also been a while since the last 2% daily rise. Volatility has stayed below the historic average all this year and last traded above historic norms back in October. Uncertainty appears to have ebbed despite all the geopolitical and Fed policy question marks, perhaps a sign that investors are more focused on the solid U.S. economic performance so far this year.
Tricky navigation: Emerging-market local-currency bonds have rallied sharply since last October, along with other risky segments of the global bond market, said Kathy Jones, chief fixed income strategist at Schwab, in her latest post. There is room for the trend to continue, but these bonds are typically more volatile and carry higher risks than developed market bonds.
April 11: March PPI and March core PPI and expected earnings from CarMax (KMX).
April 12: University of Michigan preliminary April Sentiment, and expected earnings from JPMorgan Chase (JPM), Wells Fargo (WFC), BlackRock (BLK), and Citigroup (C).
April 15: March Retail Sales and expected earnings from Goldman Sachs (GS).
April 16: March Housing Starts and Building Permits and expected earnings from UnitedHealth (UNH), Johnson & Johnson (JNJ), Morgan Stanley (MS), and Bank of America (BAC).
April 17: Expected earnings from Abbott Labs (ABT), ASML (ASML), Travelers (TVR), U.S. Bancorp (USB), and Alcoa (AA).
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