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The stock market ended sharply lower on Thursday amid fears of rising interest rates. The latest read on consumer inflation showed a 40-year high and a key member of the Federal Reserve signaled that the central bank might take aggressive action as a result, sparking a nearly 2% slide in the S&P 500.
It was a choppy day, with stocks selling off early after hot inflation data before fighting their way back to positive territory. However, they took another downward turn late in the session after St. Louis Fed President James Bullard said he is looking for the fed funds rate to hit 1% by July — suggesting an accelerated rate-hiking campaign.
The major averages each closed in negative territory with the S&P 500 (SP500) -1.8%, Dow (DJI) -1.4% and Nasdaq (COMP.IND) -2.1%.
Rates moved higher, with the 10-year Treasury yield topping 2% for the first time since August 2019.
Bullard backed a half-point rate hike in the first half of the year and fed swaps are now pricing in a 75% chance of a 50-basis-point increase in March and fed funds hitting 1% in three meetings.
All S&P sectors concluded in the red, with Materials finally giving up its gains. Energy was among the least weak sectors. Real Estate and IT slump the most.
Headline CPI came in at an annual rate of 7.5% for January, topping forecasts for 7.3%. The core CPI was also hot at 6%, ahead of expectations for 5.9%.
The Treasury yield curve flattened during the session. The 10-year Treasury yield rose 9 basis points to 2.02%, but the 2-year, more sensitive to Fed hikes, advanced 25 basis points to 1.62%.
“Quite a reaction in yields on US government #bonds with spillovers for other asset classes,” closely watched bond expert Mohamed El-Erian tweeted. “This includes a sharp rise in the 2-year yield to above 1.40% together with a flattening of the 2s-10s. Bottom line: #Markets worrying about a late #Fed forced into playing massive catchup.”
“The good news in this CPI report – really – is that new vehicle prices were unchanged, after eight straight monthly increases of more than 1% per month,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, stated. “This is a significant development. Rising inventory, on the back of increasing chip supply, is both boosting sales and capping prices. We expect new vehicle prices to fall outright over the next few months.”
“Used vehicle prices will fall too,” he added. “They rose 1.5% in January, consistent with rising auction prices a couple months ago, but auction prices appear now to be falling and the CPI measure will follow. Used vehicle inflation is 40.5% y/y, compared to the zero pre-Covid trend, so they have a long way to fall.”
Among S&P moves, Disney is one of the best gainers after strong results, while Lumen Technologies is the big decliner.