Market Sets a New Tone Amid Inflation Fears Market Sets a New Tone Amid Inflation Fears

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By Ronald Tech

Engraved Wall Street sign, New York, USA

On Friday, U.S. stocks concluded the week in the red as fresh economic data pointed to ongoing challenges in the battle against inflation. Wall Street’s five-week winning streak came to a halt as market participants tempered their expectations for Federal Reserve interest rate cuts.

New Market Figures

The tech-heavy Nasdaq Composite (COMP.IND) dipped by 0.82%, closing at 15,775.65 points, while the blue-chip Dow (DJI) retreated 0.37% to settle at 38,627.99 points. The benchmark S&P 500 (SP500) slipped 0.48% to conclude at 5,005.55 points. Eight out of the 11 S&P sectors ended in the red, with Communication Services experiencing the most significant decline, while Materials topped the gainers.

“U.S. equity markets are down a touch today – less than 1% in the case of the Nasdaq (COMP.IND), S&P 500 (SP500) or Dow (DJI) – likely as a result of profit-taking and hedging by major market participants heading into the long weekend,” commented Alex King, investing group leader of Cestrian Capital Research, to Seeking Alpha.

Inflation Concerns

Before the opening bell on Friday, the U.S. Bureau of Labor Statistics revealed that the producer price index (PPI) rose 0.3% M/M in January, exceeding the expected increase of 0.1%. Core PPI, which excludes food and energy, came in at +0.5% M/M, compared to a consensus of +0.1%. This data followed a strong consumer price index report, highlighting the persistent challenge of inflation against the Fed’s desired trajectory.

Treasury yields also saw an uptick in response to the PPI data, with the 30-year yield (US30Y) rising by 2 basis points to 4.44%, the 10-year yield (US10Y) up by 5 basis points to 4.29%, and the 2-year yield (US2Y) climbing by 8 basis points to 4.65%.

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Market Expectations

The University of Michigan’s reading of consumer sentiment for February remained relatively stable compared to January. However, year-ahead inflation expectations inched up slightly to 3.0% from 2.9% in the prior month. The CPI and PPI reports prompted a significant revision in market expectations for interest rate cuts. According to the CME FedWatch tool, the likelihood of a 25 basis point rate cut by the Fed in March dropped to 11%, down from 16% a week ago and a substantial 63% a month ago.

For the week, the S&P 500 (SP500) experienced a 0.42% decline, marking its first negative week since the first week of 2024. Despite robust inflation readings in recent days, the index’s overall decline was contained, largely due to continued gains in megacap technology stocks. Meanwhile, the Nasdaq (COMP.IND) fell 1.34% for the week, and the Dow (DJI) dipped by 0.11%.

Market Outlook

“Thus far, neither hot CPI, hot PPI, recessions in Japan and Europe, nor tales of unusual weather patterns across the polar ice caps have managed to stop the mighty bull in its tracks. The major indices are overdue a pullback, and we may get one into March. We continue, however, to look higher towards year-end,” noted Cestrian Capital’s King.

Active Movers

Among active movers, a post-earnings surge in Applied Materials (AMAT) lifted chip stocks, while The Trade Desk (TTD) saw a jump after providing a positive outlook for 2024. Conversely, DoorDash (DASH) and Roku (ROKU) experienced declines, with the former impacted by higher labor costs and the latter by market expectations for stronger quarterly results.