Before the release of a crucial U.S. inflation report, the momentum in the U.S. stock market has diminished. The surge in U.S. Treasury yields has sparked concerns among investors, affecting stock performance. The Bloomberg Dollar Index also reached its highest level in two years.
The U.S. October CPI report, set for release, could significantly influence the Federal Reserve's future policy decisions. This has led Wall Street to reconsider market trends, shifting focus from the recent "Trump Trade" to the potential rate cut trajectory by the Federal Reserve.
The U.S. stock market experienced a downturn, with the S&P 500 closing down, ending its four-day winning streak. Key "Trump Trade" stocks suffered losses, with Tesla (TSLA, Financial) down 6.1%, the Trump Media & Technology Group falling nearly 9%, and small-cap stocks under pressure, leading to a 1.87% drop in the Russell 2000 Index.
Mark Malek, Chief Investment Officer at Siebert, suggested the market may have overextended itself, with core economic challenges now coming back into focus as election-related uncertainties fade.
Simultaneously, the U.S. Treasury market saw heavy selling, pushing bond yields higher, driven by investor reactions to President-elect Trump's tax and tariff policies, which are anticipated to boost inflation and potentially slow Fed rate cuts. The two-year Treasury yield rose to its highest since July 31, while the 10-year yield saw its largest daily increase since early October.
As Treasury yields climb, enhancing the dollar's interest rate advantage, the dollar index rose 0.51% to 105.96, briefly hitting 106.17, the highest since early May.
Macquarie strategist Thierry Albert Wizman noted ongoing inflation concerns linked to tariff and anti-immigration policies. He emphasized the importance of the upcoming CPI data, suggesting that higher-than-expected inflation, combined with Trump administration's tariff outlook, explains market anxiety.
Citigroup strategist Chris Montagu cited profit-taking as a factor that could stall post-election stock gains.
With the U.S. Federal Reserve highlighting inflation as a key factor in its December rate decision, the importance of the October CPI report is magnified. Minneapolis Fed President Neel Kashkari emphasized watching inflation data to determine the appropriateness of another rate cut at the December meeting.
Investors anticipate a 2.6% year-over-year rise in CPI for October, up from 2.4% the previous month. The core CPI is expected to maintain its annual and monthly growth rates of 3.3% and 0.3%, respectively.
Inflation has become a focal point in the U.S. election, with economic dissatisfaction believed to have aided former President Trump's return to the political arena. Concerns about high consumer prices persist, even as inflation receded from pandemic peaks.
Quincy Krosby of LPL Financial remarked on the disparity between inflation figures and consumer experiences, noting the persistent high costs of everyday goods like groceries. The Labor Department's September CPI report showed only modest declines, with pressures remaining in numerous sectors.
Tani Fukui of MetLife Investment Management warned of significant market volatility following the CPI report, suggesting that any substantial surprises could lead to heightened market reactions.
A survey by 22V Research indicated a mixed investor outlook on the CPI report's impact, with expectations of risk aversion or mixed reactions.
Fed rate futures traders are currently pricing a 59% chance of a Fed rate cut in December, though confidence has waned amid inflation control challenges.
