Tuesday saw a significant downward shift in stocks, primarily due to an unexpectedly high inflation rate in the U.S. Major averages like the Dow fell significantly, reversing the record highs achieved the previous day.
Although these averages have improved slightly from their lowest points, they remain decidedly negative. The Dow has dropped 462.33 points (or 1.2%) to 38,335.05, the Nasdaq by 215.84 points (or 1.4%) to 15,726.71, and the S&P 500 by 59.56 points (or 1.2%) to 4,962.28.
This stock market downturn followed the release of a much-anticipated report by the Labor Department on U.S consumer prices, which turned out slightly higher than predicted in January. According to this report, the consumer price index rose 0.3% in January as compared to a 0.2% increase in December. Economists predicted a continued 0.2% rise.
Although the report indicates that the yearly rate of consumer price growth slowed from 3.4% in December to 3.1% in January, economists had expected this growth rate to drop even further to 2.9%.
When food and energy prices are excluded, core consumer prices increased by 0.4% in January, slightly more than the 0.3% rise noted in December. The expectation was another 0.3% rise.
The January core consumer price yearly rate remained consistent with the previous month at 3.9%, despite expectations of a slow down to 3.7%.
Given the Federal Reserve's insistence on bolstered "confidence" in slowdown of inflation before reducing interest rates, optimism around an immediate rate cut has weakened. According to CME Group's FedWatch Tool, there's now only an 8.5% chance of a quarter-point rate cut in March, with May's probability dropping to 37.6%.
Quincy Krosby, Chief Global Strategist for LPL Financial, categorizes the report as a "disappointment," stating that it conflicts with the anticipation of easing rates in response to lower inflation. In his view, this report emphasizes the Federal Reserve's continuous need for inflation-centric data before executing a policy transition, proving to be a hindrance for even the most dovish wing of the Federal Open Market Committee (FOMC).
In response to the data, the benchmark ten-year note's treasury yields have noticeably increased, reaching a two-month high.
Gold stocks have seen a major decrease, bringing the NYSE Arca Gold Bugs Index to a four-month intraday low with a drop of 5.3%. This follows a drastic decline in the price of gold, now down by $28.80 to $2,004.20 an ounce.
Networking stocks, like housing stocks and others sensitive to interest rates, have exhibited significant weakness. This comes after a 2.5% surge on Monday, with the NYSE Arca Networking Index now nose-diving by 3.8%.
Other sectors, such as commercial real estate, transportation, and banking, have also noted substantial dips, following the trend of most other major sectors.
It's a mixed bag in overseas trading. Asian-Pacific stock markets varied on Tuesday, with some markets such as Hong Kong and mainland China being closed due to holidays. Japan's Nikkei 225 Index saw a 2.9% surge, while Australia's S&P/ASX 200 Index slumped slightly by 0.2%. European markets, however, all trended downwards. The U.K.'s FTSE 100 Index is down by 1.0%, the French CAC 40 Index has fallen by 1.1%, and the German DAX Index by 1.2%.
The release of U.S inflation data has adversely affected the bond market, with treasuries dropping significantly. Consequently, the yield on the core ten-year note is up by 10.1 basis points, landing at 4.273 percent.
