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, the S&P 500 pushed decidedly 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 to its 2% target, the February CPI was not a shocker to traders dreading another post-inflation selloff.

“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 rose nearly 1% — and was on track for another all-time high. Tech led gains on Tuesday, with Nvidia Corp. up 5%. Bonds fell ahead of this week’s remaining auctions — a 10-year note at 1 p.m. New York time and a 30-year bond on Wednesday — 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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In fact, the options market was more concerned about a potentially big S&P 500 move on Tuesday’s inflation report than it was about the Fed’s rate decision next week, Citigroup analysts said Monday.

The S&P 500 was implied to move 0.9% in either direction Tuesday, based on a strategy known as an at-the-money straddle — that’s 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.

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.

Corporate Highlights:

• Oracle Corp. reported a spike in bookings in its cloud computing business, showing progress in its bid to capture more of the competitive market.

• 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.

• 3M Co. named aerospace veteran William Brown its new chief executive officer, ending a turbulent run of nearly six years for Mike Roman marked by a declining stock and growing concerns over legal liabilities related to so-called forever chemicals.

• Deutsche Bank AG Chief Executive Officer Christian Sewing vowed to meet previous cost targets, saying he’s working on additional measures.

• Southwest Airlines Co. plans to cut flying capacity for the full year, halt most hiring and rework schedules after Boeing Co. slashed expected 737 Max deliveries as the planemaker faces regulatory and criminal investigations over safety issues.

• Archer-Daniels-Midland Co. revised its intersegment sales for the last three years following an internal probe into its financial reporting and disclosed a $137 million impairment charge related to its animal nutrition unit. The shares rose in early trading.

• Scholastic Corp., the biggest publisher and distributor of children’s books, has agreed to acquire 9 Story Media Group, as it looks for ways to broaden the audience for its library of children’s stories.

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 0.8% as of 12:06 p.m. New York time

• The Nasdaq 100 rose 1%

• The Dow Jones Industrial Average rose 0.5%

• The Stoxx Europe 600 rose 1%

• The MSCI World index rose 0.7%

Currencies

• The Bloomberg Dollar Spot Index rose 0.2%

• The euro was little changed at $1.0918

• The British pound fell 0.3% to $1.2779

• The Japanese yen fell 0.6% to 147.78 per dollar

Cryptocurrencies

• Bitcoin fell 0.6% to $71,689.76

• Ether fell 1.3% to $3,980.07

Bonds

• The yield on 10-year Treasuries advanced five 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 0.6% to $78.38 a barrel

• Spot gold fell 0.9% to $2,162.62 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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