Fed Inflation Readings Push Up Interest Rates and Cause Market Downturn

The Personal Consumption Expenditures (PCE) price index, the Federal Reserve's preferred measure of inflation, rose 0.6% in January and 5.4% from last year.[0] When removing the more volatile components of food and energy, prices were up 0.6% compared to the month prior and 4.7% when compared to the same month in the previous year.[1] The figures were hotter than expected and marked the largest increase since June.

Additionally, the revision of February Michigan consumer sentiment arrived at 67, above the consensus figure of 66.4.[2]

Forecasters anticipate that new home sales for January will come in at an annualized rate of 630,000, which is slated to be released at 10 am ET and is higher than the 616,000 rate seen in December.[3] The final reading of the University of Michigan consumer sentiment index for February is expected to remain the same as the mid-month flash, measuring 66.4.[3]

Two other significant readings due today are the Personal Income and Consumer Spending Reports.[4] January's personal income reading is expected to rise 1.2% over the prior month, while the metric had grown only 0.2% in December.[3] It is predicted that consumer expenditure will increase by 1.4% in January, after having dropped by 0.2% in the preceding month.[3]

The minutes from the Fed's last meeting on Jan. 31 and Feb. 1 showed that while there were signs of inflation easing, central bank officials were still concerned about rising prices.[5] It was also noted that additional rate increases are probable.[6]

Loretta Mester, President of the Cleveland Federal Reserve, noted that the increased-beyond-anticipated inflation rate needed to be addressed through additional interest rate increases; however, she did not advocate for an immediate increase of 0.5%.[7] She added that the report is “in line with the idea that the Federal Reserve needs to take further action on the policy rate to ensure that inflation is decreasing.”[7]

Stocks slumped after the inflation reading as markets reacted to the likelihood that the Fed may need to keep rates higher for longer.[7] The S&P 500 and tech-heavy Nasdaq 100 tumbled about 2%, while the two-year rate hit 4.8%, the highest since 2007.[8] All Group-of-10 currencies depreciated against the dollar.[7] Swaps are now pricing 25 basis-point hikes at the Fed’s next three meetings and expectations on the peak rate edged higher to about 5.4% by July.[8]

0. “Dow falls more than 300 points after Fed’s favorite inflation gauge runs hotter than expected” MarketWatch, 24 Feb. 2023, https://www.marketwatch.com/story/u-s-stock-futures-weaken-ahead-of-key-inflation-data-efb982a2

1. “Stock market news today: Stocks slide after hotter-than-expected key inflation print” Yahoo News, 24 Feb. 2023, https://news.yahoo.com/stock-market-news-today-february-24-2023-104349492.html

2. “Nasdaq, S&P, Dow fall on hot PCE inflation data” msnNOW, 24 Feb. 2023, https://www.msn.com/en-us/money/markets/nasdaq-sandp-dow-fall-on-hot-pce-inflation-data/ar-AA17T1gw

3. “PCE Inflation Outlook Fuels Premarket Losses for US Equity Futures” msnNOW, 24 Feb. 2023, https://www.msn.com/en-us/money/markets/pce-inflation-outlook-fuels-premarket-losses-for-us-equity-futures/ar-AA17TcYf

4. “Stock Market News Today: Stocks in the Red after Hot Inflation Report” TipRanks, 24 Feb. 2023, https://www.tipranks.com/news/stock-market-news-today-futures-trend-down-ahead-of-key-economic-data

5. “S&P 500, Dow slide again after another hawkish signal from Fed; Nasdaq posts gain” Seeking Alpha, 22 Feb. 2023, https://seekingalpha.com/news/3939382-sp-500-dow-slide-again-after-another-hawkish-signal-from-fed-nasdaq-posts-gain

6. “Treasury yields rise ahead of key inflation data” CNBC, 24 Feb. 2023, https://www.cnbc.com/2023/02/24/treasury-yields-little-changed-as-investors-assess-fed-minutes-data.html

7. “Tech Crushed as Bond Yields Climb on Hot Inflation: Markets Wrap” Yahoo! Voices, 24 Feb. 2023, https://www.yahoo.com/now/asia-stocks-open-mixed-bumpy-224011362.html

8. “Stock Market Today: Dow, S&P Live Updates for Feb. 24” Bloomberg, 23 Feb. 2023, https://www.bloomberg.com/news/articles/2023-02-23/asia-stocks-to-open-mixed-after-bumpy-us-session-markets-wrap

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