New York Stock Market Falls on Hot March CPI... Bond Yields Surge as Pivot Becomes Unlikely

Core CPI Up 3.8% in March Exceeding Expectations
June Rate Cut Hopes Fade... September Cut Outlook Also
US Treasury Yields Near 5% for 2-Year, 4.5% for 10-Year

The three major indices of the U.S. New York stock market showed a downward trend in the early trading hours on the 10th (local time). Following strong employment data last month and hot inflation figures, the expectation of an interest rate cut in the first half of the year has vanished, leading to a flood of disappointment-driven selling. With forecasts emerging that the U.S. Federal Reserve (Fed) may initiate its first rate cut in September, U.S. Treasury yields surged sharply, with the 2-year yield threatening the 5% level and the 10-year yield approaching 4.5%.

[Image source= Xinhua News Agency]

As of 9:39 a.m. at the New York Stock Exchange (NYSE) on the day, the Dow Jones Industrial Average was down 1.29% from the previous close, standing at 38,381.29. The large-cap-focused S&P 500 index fell 1.09% to 5,152.94, and the tech-heavy Nasdaq index traded down 1% at 16,143.4.

The U.S. Department of Labor announced that last month's Consumer Price Index (CPI) inflation rate once again exceeded market expectations. The March CPI rose 0.4% month-over-month and 3.5% year-over-year, surpassing expert forecasts of 0.3% and 3.4%, respectively. The core CPI, which the Fed closely monitors, increased 0.4% month-over-month and 3.8% year-over-year, matching the previous month's 3.8% but still exceeding market expectations of 0.3% and 3.7%. The core CPI excludes volatile energy and food prices to reflect the underlying inflation trend.

Housing costs and gasoline price increases contributed to more than half of the monthly CPI rise. Housing costs rose 0.4% month-over-month, maintaining the February increase of 0.4%. Gasoline prices increased 1.7% month-over-month, a smaller rise than February's 3.8%, but still a significant contributor to the CPI increase. Auto insurance, clothing, education, furniture, and medical expenses also stimulated the core CPI rise.

Following strong employment data last week and hot inflation figures on this day, expectations for Fed rate cuts are retreating. According to the March employment report released earlier by the U.S. Department of Labor, nonfarm payrolls increased by 303,000 last month, significantly exceeding the forecast of 214,000. According to the Chicago Mercantile Exchange (CME) FedWatch tool, after the March CPI release, the federal funds futures market priced in about a 21% chance of the Fed cutting rates by at least 0.25 percentage points at the June Federal Open Market Committee (FOMC) meeting, down sharply from 57% the day before and 72% a month ago. The probability of a 0.25 percentage point or greater rate cut in July fell to 47% from 74% the previous day. This indicates that investors are increasingly betting on the Fed starting rate cuts in September.

David Kelly, Chief Global Strategist at JP Morgan Asset Management, analyzed that "the door to a June rate cut is firmly closed."

Karen Manna, Portfolio Manager at Federated Hermes, said, "The CPI report shows that disinflation (a slowdown in inflation) has disappeared and inflation remains," adding, "Expectations that the Fed will ease monetary policy this year will be reassessed lower."

With rate cut expectations fading, Treasury yields are surging. The 2-year U.S. Treasury yield, sensitive to monetary policy, rose 16 basis points (bps) to 4.9%, while the 10-year U.S. Treasury yield, a global bond yield benchmark, increased 12 bps to around 4.49% (1 bp = 0.01 percentage points).

The market is awaiting the release of the March Federal Open Market Committee (FOMC) minutes later in the afternoon after the CPI announcement. With the Fed maintaining its forecast of three rate cuts this year in last month's dot plot, investors are expected to look for hints about the future rate path from the FOMC minutes.

Fed officials' remarks are also scheduled for the day, including Fed Governor Michelle Bowman and Chicago Fed President Austan Goolsbee. New York Fed President John Williams and Atlanta Fed President Raphael Bostic are set to speak the following day.

By sector, bank stocks, industrial stocks, and tech stocks are declining. JPMorgan Chase, the largest U.S. bank, is down 0.99%. Caterpillar, the world's largest construction equipment manufacturer, is down 1.71%. Microsoft (MS) and Apple shares are down 1.31% and 1.26%, respectively. Nvidia shares are up 0.92%.

International oil prices are rising. West Texas Intermediate (WTI) crude oil is up $0.11 (0.13%) to $85.34 per barrel. Brent crude is trading up $0.17 (0.19%) at $89.59.