Stock Traders Bracing for Worst Shrug Off Hot CPI: Markets Wrap

(Bloomberg) — The stock market managed to rebound after the latest inflation figures did little to alter bets the Federal Reserve will cut rates this year — even if it keeps a more cautious stance for now.

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Following a series of twists and turns, equities remained higher. Notwithstanding the fact that the consumer price index continued to show some signs of “stickiness,” the overall report came only slightly above estimates. While that’s not ideal for a central bank trying to get close to its 2% target, the February CPI was not a shocker to traders dreading another post-inflation rout.

“Fears have been circulating prior to the release for an extra-hot print, which appears to have boosted markets as they failed to materialize,” said Josh Jamner at ClearBridge Investments. “Overall, there should be relatively little market impact from today’s release given it is largely consistent with the prior understanding of the disinflationary process.”

The S&P 500 halted a two-day drop. Tech led gains on Tuesday, with Oracle Corp. soaring 12% amid a spike in bookings in cloud computing. Among megacaps, Nvidia Corp. climbed, while Tesla Inc. and Apple Inc. fell. Boeing Co. extended its 2024 losses to 30%.

Treasuries fell amid this week’s remaining auctions and a growing slate of new corporate bonds.

For a glimpse of how traders were on guard before Tuesday’s CPI print, consider the Cboe One-Day Volatility Index — a measure of cost in S&P 500 options with maturities of no more than 24 hours. The gauge closed Monday at the highest level since October, a sign of heightened anxiety.

It has since pulled back, along with its more famous 30-day volatility index known as the VIX.

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On Monday, the options market was more concerned about a potentially big S&P 500 move post-CPI than it was about the Fed’s rate decision next week, Citigroup analysts said. That was based on a strategy known as an at-the-money straddle — when a trader buys an equal number of calls and puts with the same strike price and expiration.

The introduction of zero-day to expiry options has enabled traders to open positions against specific events. Most of the increase in options pricing on the S&P 500 is concentrated in the very near-term, according to Citi strategists.

Underlying US inflation topped forecasts for a second month in February as prices jumped for used cars, air travel and clothes. The so-called core consumer price index, which excludes food and energy costs, increased 0.4% from January, according to government data out Tuesday. From a year ago, it advanced 3.8%.

While the CPI reading may breathe new life into the sticky inflation narrative, whether it actually delays rate cuts is a different story, according to Chris Larkin at E*Trade from Morgan Stanley.

“Sticky doesn’t necessarily mean overheating,” Larkin noted.

To Bret Kenwell at eToro, regardless of whether the inflation print is ideal, investors mostly want to know whether they can count on what’s expected — and right now, that’s for a June rate cut.

Indeed, the inflation reading did little to alter traders’ conviction that the Fed will shift to cutting interest rates this year. Futures are pricing in nearly 70% odds that the central bank will start easing in June and enact at least three quarter-point cuts over the course of 2024.

“The Fed usually cuts interest rates to get ahead of an impending economic slowdown, and with the economy running so strong currently, it’s difficult to justify any rate cuts,” said Skyler Weinand at Regan Capital. “Still, the Fed is likely to cut interest rates one or two times this year, as an acknowledgement that inflation has meaningfully decelerated, even if it’s not quite fully back to its 2% target.”

The Fed is widely expected to hold interest rates steady for a fifth straight meeting when policymakers gather March 19-20. Much of the focus by investors will be on the Federal Open Market Committee’s quarterly forecasts for rates, including whether fresh employment and inflation figures have prompted any changes.

While the stock market is rallying, the yield curve remains inverted, which suggests that there are plenty of investors who are still concerned about economic conditions this year, according to Skyler Weinand at Regan Capital.

“While a recession would naturally steepen out the yield curve to positive territory, we think the yield curve can steepen this year without a recession, as investors will eventually realize that we can achieve a soft landing and that sentiment shift can push 10-year Treasury bond yields back above 2-year Treasury bond yields,” he noted.

Corporate Highlights:

• 3M Co. named aerospace veteran William Brown as its new chief executive officer, a move aimed at providing fresh direction for a company mired in mounting legal liabilities and a much-diminished stock price.

• Boeing Co.’s aircraft deliveries trailed rival Airbus SE’s last month as the US planemaker dealt with the growing fallout from an early-January accident that has since plunged the company into crisis.

• United Airlines Holdings Inc. has told Boeing to stop building 737 Max 10 jets for the carrier, opting to switch to a smaller variant and the rival Airbus SE A321 until the US planemaker can pull the stretched single-aisle through its long-delayed certification.

• Southwest Airlines Co. plans to cut capacity this year, halt most hiring and review its spending plans in response to reduced aircraft deliveries from Boeing Co., the planemaker facing regulatory and criminal investigations in the wake of a near-catastrophic accident in January.

• Kohl’s Corp. reported same-store sales in the fourth quarter that missed the average analyst estimate, suggesting the department store chain struggled to attract shoppers during the crucial holiday shopping season.

Key events this week:

• Eurozone industrial production, Wednesday

• ECB Governing Council member Yannis Stournaras speaks, Wednesday

• Volkswagen, Adidas earnings, Wednesday

• US PPI, retail sales, initial jobless claims, business inventories, Thursday

• China property prices, Friday

• Japan’s largest union federation announces results of annual wage negotiations, just ahead of Bank of Japan policy meeting, Friday

• Bank of England issues inflation survey, Friday

• US industrial production, University of Michigan consumer sentiment, Empire Manufacturing, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.6% as of 12:49 p.m. New York time

• The Nasdaq 100 rose 0.7%

• The Dow Jones Industrial Average rose 0.2%

• The Stoxx Europe 600 rose 1%

• The MSCI World index rose 0.5%

Currencies

• The Bloomberg Dollar Spot Index rose 0.2%

• The euro was little changed at $1.0916

• The British pound fell 0.3% to $1.2781

• The Japanese yen fell 0.5% to 147.68 per dollar

Cryptocurrencies

• Bitcoin fell 2% to $70,685.01

• Ether fell 2.4% to $3,937.42

Bonds

• The yield on 10-year Treasuries advanced six basis points to 4.15%

• Germany’s 10-year yield advanced three basis points to 2.33%

• Britain’s 10-year yield declined two basis points to 3.95%

Commodities

• West Texas Intermediate crude rose 0.4% to $78.21 a barrel

• Spot gold fell 0.8% to $2,165.68 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Lu Wang, Felice Maranz, Michael Mackenzie, Ye Xie and David Marino.

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