Dow down 250 points after hot PPI release in January, notes Fed’s Mester

U.S. stocks tumbled Thursday morning as investors digested another hot inflation report that showed price pressure at wholesale levels rose more-than-expected in January, fueling fears that the Federal Reserve will raise interest rates higher than expected. expected.

How stock index futures are traded
  • S&P 500 SPX,
    -0.68%
    fell 30 points, or 0.7%, to 4117

  • Dow Jones industrial index DJIA,
    -0.71%
    fell 265 points, or 0.8%, to 33,862

  • Nasdaq Composite COMP,
    -0.66%
    fell 81 points, or 0.7%, to 11,989

On Wednesday, the Dow Jones Industrial Average rose 39 points, or 0.11%, to 34,128, the S&P 500 rose 11 points, or 0.28%, to 4,148, and the Nasdaq Composite rose 110 points, or 0. 92%, up to 12,071.

What drives the markets

Stocks plummeted Thursday morning as traders weighed in on the latest batch of mixed US economic data and hawkish comments from Cleveland Federal Reserve Bank President Loretta Mester.

See: Rise in US wholesale inflation in early 2023, PPI shows

After the January CPI showed only slow progress in lowering inflation, wholesale inflation also rebounded in January. US wholesale prices jumped 0.7% at the beginning of the new year, the biggest increase since last summer, further evidence that inflation is volatile and unlikely to fall quickly.

A separate measure of wholesale prices, which excludes volatile food and energy costs, surged 0.6% last month, the biggest increase in 10 months.

“Today’s wholesale inflation data, combined with the CPI report, shows that the easy battles against price pressure have been won. We believe that the transition from 9% to 6% [inflation level] will be much less of a challenge than going from 6% to 3%,” wrote John Lynch, chief investment officer of Comerica Wealth Management, in an email comment.

Still, Lynch said firmer-than-expected inflation means the Federal Reserve is likely to remain resilient in its fight against inflation, pursuing a tighter policy and longer than stock markets have estimated since October.

Stronger-than-expected wholesale inflation weighed heavily on US stocks and boosted the yield on the 10-year TMUBMUSD10Y Treasury.
3.829%
higher. The ICE US dollar index, which reflects the currency against a basket of six major competitors, rose 0.2% on Thursday to 104.11.

See: The Fed’s Mester said she saw “compelling” arguments in favor of a half-point hike at the January meeting.

Cleveland Fed President Loretta Mester said in a speech following Thursday’s wholesale inflation report that she would like the central bank to be more aggressive at its latest interest rate committee meeting in January and saw a “convincing” case for a rate hike. half a point in that meeting when politicians raised the federal funds rate by a quarter of a percentage point.

“Indeed, at our meeting two weeks ago, apart from what financial market participants expected from us, I saw a compelling economic case for a 50 basis point hike, which would increase the target range to 5 percent,” Mester said.

Mester did not have the right to vote at the political meeting of January 31-February 1. The Committee voted unanimously to raise the base interest rate by 25 basis points to a range of 4.5% to 4.75%.

In recent sessions, traders have digested data showing that US inflation remains tight and retail sales are strong. They followed an unexpectedly strong employment report earlier in the month.

“With these price moves putting pressure on earnings and interest rates, investors should prepare to retest October lows,” Lynch said.

Therefore, the US Treasury benchmark yield is TMUBMUSD10Y.
3.829%
close to their 2023 high, but the S&P 500 is not at its best level since August, up 7% year-to-date.

See: Stocks face ‘significant’ downside risk amid ‘complacent’ markets: JPMorgan

An indicator of how calm investors have become about the current market scenario is the level of the CBOE VIX VIX index,
+4.99%,
a measure of the expected volatility of the S&P 500, and tends to spike when traders get nervous. The index hovered around 18 ahead of wholesale inflation data but rose to 21.9 on Thursday morning.

Part of the reason for the VIX’s decline is that the S&P 500 has wandered in a relatively tight range over the past 10 sessions, said Mark Newton, head of technical strategy at Fundstrat.

“U.S. equity markets are holding up much better than you might expect as Treasury yields rise. This will need to be closely monitored,” he said in a note to clients.

“There remains a real threat of minor weakness at the end of February, and this will officially occur at a break of SPX 4060 (although even weakness below 4095 warns that this could start). Conversely, 4160 as well as 4176 are two areas to watch for growth,” Newton added.

In other economic data, U.S. seasonally adjusted new home construction fell 4.5% to 1.31 million in January, the Commerce Department said Thursday. The fall in home construction followed a decline in December, when home construction also fell by 3.4%.

The number of Americans who filed for unemployment benefits remains below 200,000 for the fifth week in a row, indicating that the US labor market is still quite strong. New filings fell from a revised 195,000 to 194,000 the previous week, the government said on Thursday.

Companies in the spotlight
  • Cisco Systems
    CSCO,
    +5.11%
    shares rose 6.2% on Thursday after the networking equipment maker beat expectations for holiday quarter revenue growth and executives predicted stronger gains in a revised full-year guidance that saw shares rise more than 3% after business hours on Wednesday .

  • Roku
    ROCU,
    +17.74%
    rose 13.3% after the digital media player maker said consumers were streaming more content than expected through Roku Inc.’s platform. in the fourth quarter, which helped deliver strong revenue growth despite macroeconomic pressures.

  • Paramount Global
    PAIR,
    -3.91%
    fell 2.9% after the media giant fell short of revenue expectations for the latest quarter but also posted a loss.

  • Shopify
    SHOP,
    -16.10%
    tumbled 15.4% after the online retailer posted a better-than-expected holiday quarter, according to Wednesday’s earnings report, but slower revenue growth forecast hit the stock after hours.

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