Stocks Fall as Inflation Rises and Tensions Escalate – Nasdaq down 0.7%
US equity markets finished mixed overnight as investors reacted to another stronger-than-expected US inflation print. Technology stocks led the declines, dragging the Nasdaq down 0.71% to 26,088, while the S&P 500 slipped 0.16% to close at 7,400. The Dow Jones managed to edge 0.11% higher to 49,760 as defensive sectors outperformed in cautious trade. US Treasury yields moved sharply higher following the data, with the 2-year yield rising 3.8 basis points to 3.992% and the benchmark 10-year yield climbing 5 basis points to 4.463%. The move in yields helped push the US dollar broadly stronger, with the DXY gaining 0.36% to 98.31. Geopolitical concerns also remained front of mind for markets as traders continued to monitor the risk of an end to the ceasefire agreement in the Gulf. Oil prices extended their recent rally amid fears that the Strait of Hormuz could remain closed for an extended period, further tightening global supply conditions. Brent crude surged 3.18% to settle at $107.52 per barrel, while WTI crude jumped 4.10% to $102.00. Despite the elevated geopolitical tensions and stronger oil prices, gold eased back into recent trading ranges, with the precious metal slipping 0.43% to close at $4,713.65 per ounce as the stronger US dollar weighed on sentiment.
Inflation and Jobs Data Point One Way for the Fed
Last night’s CPI data came in stronger than expected, reinforcing expectations that the Federal Reserve is unlikely to deliver any rate cuts this year, and unless we see a sharp turnaround in data in the coming months, the market is now looking for the next move from the FOMC to be a hike. Friday’s jobs numbers started the move, and they were reinforced by last night’s numbers. The earliest that the market now expects a rate move is the October meeting, with the market now seeing an 18% chance that a hike could be implemented then, and just a 3% chance of a cut. However, the real moves in expectations have come for the December meeting, with chances of a 25-basis-point hike now up to 30% after last night’s data. If the CPI print is reinforced by another strong number in today’s PPI release, then traders are expecting those hike odds to increase and US yields and the dollar to start to pick up more topside momentum.
Geopolitics and Inflation Data in Play Again Today
Geopolitics is again likely to set the tone for most of the trading day today, with updates from the Middle East the most impactful, while markets will also remain highly sensitive to headlines surrounding President Trump’s trip to China, with any developments on trade negotiations likely to generate further volatility across FX, commodity, and equity markets. The Asian session will see a focus on Australian markets early in the day, with Wage Price Index (exp +0.8%) numbers due out. There is again little of note in the London session; however, in the US session, focus will turn to another key US inflation update tonight, with Producer Price Index (PPI) data due during the New York session. The market is expecting the headline month-on-month number to show a 0.5% increase, with the core data showing a 0.3% increase.
Explore all upcoming market events in the Economic Calendar.
