Financial Services Association, Feb. 14: China has always had the custom of welcoming the god of fortune on the 5th day of the new year. However, on this morning's day of welcoming the god of fortune, Wall Street on the other side of the ocean didn't seem to be doing well — the US market experienced a rare double slump in stocks and bonds for several months on Tuesday, and what is particularly disturbing behind this is that people's confidence in the Fed's interest rate cut is getting weaker and weaker...

Market data shows that the three major US stock indexes weakened sharply across the board on Tuesday. Among them, the Dow fell by more than 500 points in one fell swoop. At the close, the Dow fell 524.63 points, or 1.35%, to 38272.75 points; the NASDAQ fell 286.95 points, or 1.80%, to 15655.60 points; and the S&P 500 index fell 68.67 points, or 1.37%, to 4953.17 points.

This is the biggest one-day decline of the Dow since March 22, 2023. At one point, it plummeted by more than 750 points when it had its biggest intraday decline.

The performance in a range of segments was even worse. Small-cap stocks plummeted nearly 5% on Tuesday, the worst day since June 2020.

The stocks with the highest shorting ratio in the basket plummeted by more than 6%, the biggest one-day decline since June 2022.

Even America's “Big Seven”, which is well-off, failed to escape this heist. This was the second-worst trading day for the “Big Seven” since October last year.

Meanwhile, the CBoE Volatility Index VIX, known as the Panic Index, hit its highest level since November.

Just like US stocks, the US bond market was hit hard overnight. US Treasury yields of various maturities rose across the board on Tuesday, and 10-year Treasury yields, known as the “anchor of global asset pricing,” hit a two-and-a-half-month high. What is even more frightening is that short-term bond yields, which are most closely linked to expectations of interest rate changes, soared to an astonishing 20 basis points in a single day. The inverse between bond yields and prices.

As of the end of the New York session, the two-year US Treasury yield, which usually fluctuates in sync with interest rate expectations, climbed 17.9 basis points to 4.6493%. Previously, it had reached 4.664%, the highest level since December 13 last year. The yield is expected to record the biggest increase in single-day basis points since May 5 last year.

The indicator US 10-year Treasury yield rose 14 basis points to 4.31% on Tuesday, hitting an intraday high of 4.314% since December 1 last year. The 30-year Treasury yield rose 9.2 basis points to 4.4618%, and climbed intraday to 4.465%, the highest level since December 1.

There is no doubt that the magnitude of the double kill experienced by the US stock and bond market on Tuesday can be described as rare during the year. Against the backdrop that US stocks have repeatedly hit record highs in the past few weeks, this will no doubt seem even more surprising. However, if you look back at overnight market news, the emergence of this series of sharp market declines also seems quite logical — because the unusually “hot” US CPI data released on Tuesday did have enough “lethality” to trigger a similar sharp decline in the market.

How impactful was this CPI night?

How much influence is Tuesday's US inflation report?

The answer is: it completely changed market people's judgment on the point of interest rate cuts in the first half of this year. At the same time, expectations for interest rate cuts throughout the year are also beginning to be infinitely close to the Federal Reserve's December interest rate bitmap. In other words, in this game of interest rate expectations between the market and the Federal Reserve, the “balance of victory” is reversing to the Federal Reserve...

According to a report released by the US Department of Labor on Tuesday, the US consumer price index (CPI) for January increased by 3.1% year on year, higher than the average market forecast of 2.9%. This made people's hopes that the US CPI data could fall back to the “2 era”. Meanwhile, the previous value was revised to increase by 3.4% year over year. Compared to December of last year, CPI rose 0.3% month-on-month in January.

What is even more worrisome is the resurgence in core CPI — core prices in January, excluding volatile food and energy components, rose 0.4% month-on-month, the biggest increase in 8 months. Core CPI increased 3.9% year over year.

Looking at specific categories, the “super core CPI” most commonly talked about by Federal Reserve officials on weekdays — the price of core services excluding housing prices soared 0.7% month-on-month, the biggest increase since September 2022.

Brian Jacobsen, chief economist at Annex Wealth Management, said that CPI did make investors feel chills. “The Federal Reserve does not have a consistent set of standards for cutting interest rates, and we all know that the time to cut interest rates may have to be postponed.”

Nick Timiraos, a famous journalist known as the “New Federal Reserve News Agency,” wrote that US inflation was higher than Wall Street's expectations in January, casting a shadow over the Federal Reserve's path to cutting interest rates and may give the Federal Reserve more time to rest until the middle of this year.

“Today's consumer price index report caught many people off guard,” said Chris Zaccarelli of the Independent Advisors Union. “Many investors had previously anticipated that the Fed would start cutting interest rates and spent a long time debating when the Fed would start cutting interest rates, but they didn't realize that inflation might still be very sticky and would not continue to fall in a straight line.”

Zaccarelli pointed out that the January CPI data is still only a one-month report, and if inflation falls in February, then this will only be “a hurdle on the way.” However, if we see a new (sticky) inflation pattern stagnating at current levels — or rising from now on, the stock market is expected to fall further.

In fact, Zaccarelli's concerns are probably not unfounded. Looking back at the historical seasonal changes in US CPI data over the past few years, it is easy to find that the CPI data for February tends to rise further.

Judging from the pricing in the interest rate market, after strong inflation data was released overnight, US short-term interest rate futures traders are already betting that the Federal Reserve will not cut interest rates until June. According to CME's FedWatch tool, the market currently expects the June meeting to be the most likely point for the Fed to cut interest rates for the first time. The probability of cutting interest rates by at least 25 basis points at this meeting is 74.4%, while the possibility of cutting interest rates at the May meeting is expected to drop to 36.1% from 60.7% on Monday.

At the same time, traders recently forecast less than 4 interest rate cuts for the whole year. In fact, the latest pricing in the interest rate market currently suggests that the Fed has only about 50% chance of cutting interest rates 4 times this year — reminder, in mid-January (a month ago), the market also once estimated that the Fed would cut interest rates by 170 basis points (6 times by 25 basis points) in 2024, but now it is only half of this figure. Interest rate market pricing is indefinitely moving closer to the three annual interest rate cuts estimated by the Federal Reserve in December.

Regarding the CPI data, industry analyst Ira Jersey said, “The first reaction of the market was to expect the possibility of interest rate cuts in May not exceed 50%, because overall and core CPI exceeded expectations. It is not surprising that the US Treasury yield curve is flattening. We still believe that the 2-year/10-year Treasury yield curve may remain inverted until the Federal Reserve actually starts cutting interest rates.”

Looking ahead to the future market, NATAlliance Securities strategist Andrew Brenner predicts that the market is expected to fluctuate more during the rest of the week, “because bears are gaining the upper hand, and the bulls are still resisting.”

“Torsten Slok of Apollo Global Management (Apollo Global Management) said, “It's still too early to announce victory over inflation. Maybe this 'last mile' is actually more difficult.”

edit/emily