China has always had the custom of welcoming the God of Wealth on the fifth day of the Lunar New Year. On the day of welcoming the god of wealth this morning, the Wall Street across the ocean seems to be having a bad time - the US market suffered a rare double killing of stocks and bonds on Tuesday for several months, and what is particularly disturbing behind this is that people's confidence in the Federal Reserve's interest rate cut has become weaker and weaker
Market data shows that the three major stock indexes in the United States weakened significantly on Tuesday, with the Dow Jones falling more than 500 points in one fell swoop. As of the close, the Dow Jones Industrial Average fell 524.63 points, a decrease of 1.35%, to 38272.75 points; The Nasdaq fell 286.95 points, or 1.80%, to 15655.60 points; The S&P 500 index fell 68.67 points, or 1.37%, to 4953.17 points.
This is the largest daily decline of the Dow Jones since March 22, 2023, with the largest intraday decline occurring at a time when it plummeted over 750 points.
The performance of a series of sub sectors is even worse. Small cap stocks plummeted nearly 5% on Tuesday, marking the worst day since June 2020.
A basket of stocks with the highest short selling ratio plummeted by over 6%, marking the largest daily decline since June 2022.
Even the wealthy "Big Seven" of the United States have not escaped this calamity, making it the second worst trading day for the "Big Seven" since October last year.
At the same time, the Cboe volatility index VIX, known as the panic index, has reached its highest level since November.
Like the US stock market, the US bond market also suffered a heavy blow overnight. The yield of US treasury bond bonds of all maturities climbed on Tuesday, and the yield of 10-year treasury bond, known as the "anchor of global asset pricing", hit a two-and-a-half month high. What is even more terrifying is that the daily surge in short-term bond yields, which is most closely related to expected interest rate changes, has reached an astonishing nearly 20 basis points. Bond yields are inversely related to prices.
As of the end of the New York session, the two-year US Treasury yield, which usually fluctuates in sync with interest rate expectations, climbed 17.9 basis points to 4.6493%, previously reaching 4.664%, the highest level since December 13 last year. The yield is expected to achieve its largest daily basis point increase since May 5th last year.
The yield of benchmark 10-year treasury bond bonds rose 14 basis points on Tuesday to 4.31%, hitting the highest level since December 1 last year of 4.314% in the session. The 30-year treasury bond bond yield rose 9.2 basis points to 4.4618%, climbing to 4.465% in the session, the highest level since December 1.
Undoubtedly, the double kill market in the US stock and bond markets on Tuesday was a rare occurrence this year. Against the backdrop of the US stock market hitting historic highs in the past few weeks, this will undoubtedly appear even more abrupt. However, if we look back at the overnight market news, the emergence of this series of sharp declines seems quite reasonable - because the unusually hot US CPI data released on Tuesday does have the "killing power" to trigger similar sharp declines.
How significant is the impact of this CPI night?
How influential is Tuesday's US inflation report really?
The answer is: it has completely changed the market's judgment on the timing of interest rate cuts in the first half of this year. At the same time, people's expectations for the full year rate cut are also beginning to approach the Federal Reserve's interest rate chart in December infinitely. In other words, in this round of interest rate expectation game between the market and the Federal Reserve, the "balance of victory" is shifting towards the Federal Reserve
The report released by the US Department of Labor on Tuesday showed that the Consumer Price Index (CPI) in January increased by 3.1% year-on-year, higher than the market average expectation of 2.9%, which shattered people's hopes that the US CPI data could fall back to "era 2". Meanwhile, the previous value was revised to a year-on-year growth of 3.4%. Compared to December last year, the month on month CPI in January increased by 0.3%.
Even more concerning is the resurgence of core CPI - excluding volatile food and energy components, core prices in January rose 0.4% month on month, marking the largest increase in eight months. The year-on-year increase in core CPI was 3.9%.
From a specific classification perspective, the most commonly talked about "super core CPI" by Federal Reserve officials - core service prices excluding housing prices - surged 0.7% month on month, the largest increase since September 2022.
Brian Jacobsen, Chief Economist of Annex Wealth Management, said that the CPI has indeed made investors feel chilly. "The Federal Reserve does not have a coherent set of interest rate cutting standards, and we all know that the timing of the rate cut may be delayed."
Renowned journalist Nick Timiraos, known as the "New Federal Reserve News Agency," wrote that inflation in the United States exceeded Wall Street's expectations in January, casting a shadow over the Fed's interest rate cut path and potentially giving it more breathing time until mid year.
"Today's Consumer Price Index report caught many off guard," said Chris Zaccarelli of the Independent Advisory Alliance. "Many investors had already anticipated that the Federal Reserve would start cutting interest rates and spent a long time debating when the Fed would start cutting, but they did not realize that inflation may still be sticky and not continue to plummet."
Zaccarelli pointed out that January's CPI data is only a one month report, and if inflation decreases in February, it will still be a "hurdle on the road". However, if we see a new (sticky) inflation pattern stagnating at current levels - or starting to rise from now - then the stock market is expected to further decline.
In fact, Zaccarelli's concerns may be reasonable. Looking back at the seasonal fluctuations in US CPI data over the past few years, it is not difficult to find that the month on month CPI data in February tends to further increase.
From the perspective of pricing in the interest rate market, after the release of strong overnight inflation data, US short-term interest rate futures traders have bet that the Federal Reserve will not cut rates before June. According to the FedWatch tool of the Chicago Mercantile Exchange, the market currently expects the June meeting to be the most likely first rate cut by the Federal Reserve. The probability of a rate cut of at least 25 basis points at the meeting is 74.4%, while the likelihood of a rate cut at the May meeting is expected to decrease from 60.7% on Monday to 36.1%.
At the same time, traders have predicted less than four annual rate cuts. In fact, the latest pricing in the interest rate market currently believes that the Federal Reserve has only about a 50% chance of four rate cuts this year - to remind you, in mid January (a month ago), the market once priced the Federal Reserve as cutting rates by 170 basis points (six 25 basis point cuts) in 2024, but now it is only half of this number. The pricing of the interest rate market is infinitely approaching the Federal Reserve's three rate cuts for the full year estimated in the December lattice.
As for CPI data, Ira Jersey, an industry analyst, said, "The first reaction of the market is that it is expected that the probability of interest rate reduction in May will not exceed 50%, because both the overall and core CPI are beyond expectations. It is not surprising that the bear market of the yield curve of US Treasuries is flattening. We still believe that the yield curve of two-year/10-year treasury bond bonds may remain upside down before the Federal Reserve actually starts to cut interest rates."
Looking ahead, Andrew Brenner, strategist at NatAlliance Securities, predicts that the market is expected to experience more volatility for the rest of this week, as bears are gaining the upper hand and bulls are still stubbornly resisting.
&Amp; Quota; Torsten Slok from Apollo Global Management said, "It's too early to announce a victory over inflation. Perhaps this' last mile 'is indeed more difficult."