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US stocks fell and Treasury yields jumped on data that showed US inflation slowing less than expected, as investors scaled back bets that the Federal Reserve will start cutting interest rates as early as May.
The S&P 500 index of U.S. blue chip stocks closed 1.4% lower on Tuesday. The tech-heavy Nasdaq Composite fell 1.8%.
The market moves came after new government data showed U.S. inflation cooled less than expected in January, to 3.1% year-on-year.
After Tuesday’s statement, the probability of a rate cut in May implied by futures markets dropped from 50% to 30%, while the chances of a rate cut in March were almost completely eliminated.
The two-year Treasury yield, which moves with interest rate expectations, rose 0.18 percentage points to 4.65%, the biggest daily move since last March. The benchmark 10-year yield rose 0.14 percentage points to 4.31%. Yields rise when prices fall.
The data comes as the Fed weighs when to start cutting interest rates from the current level of 5.25% to 5.5%, after a long campaign to tame persistent price pressures.
“These are uncomfortable data for the Fed e [any] plans to cut rates relatively soon,” said Dean Maki, chief economist at Point72 Asset Management. “I think this takes a March rate cut off the table and makes a May cut unlikely.”
Economists polled by Bloomberg had forecast annual consumer price inflation of 2.9%, down from 3.4% in December.
Core inflation, a closely watched measure that excludes food and energy price volatility, was 3.9% year-on-year in January, in line with the previous month.
The dramatic overall decline in inflation over the past year has prompted central bankers in the United States, Europe and the United Kingdom to rule out further rate hikes and to begin discussing the possibility of cuts.
Fed Chair Jay Powell said last month that the Federal Open Market Committee expects to cut interest rates three times this year, but signaled that it was unlikely to begin doing so until further progress had been made toward lowering interest rates. central bank’s 2% inflation target.
“The Fed will probably need more data to feel comfortable [before cutting rates]” said Kristina Hooper, chief global market strategist at Invesco. “Progress is still happening, but it’s probably not happening as quickly as the Fed would like.”
US President Joe Biden said on Tuesday: “At a time when growth and jobs remain strong, inflation is down two-thirds from its peak, but we know there is still work to be done to reduce costs.”
The dollar, whose movements are influenced by changes in rate expectations, traded up 0.6% after the release of inflation data.
Housing, auto insurance and medical care contributed to price pressure in January. Housing, whose main component is rental costs, had the biggest impact on core inflation, with the index rising 0.6% in January.
Data on Tuesday showed that while the deflationary trend in primary goods continues, inflation in services remained strong, partly due to rising medical care costs.
The Fed’s preferred measure of inflation is the headline index of personal consumption spending, which has slowed more dramatically than the consumer price index. The core PCE index rose 2.9% in January on a year-over-year basis, the first reading below 3% in about three years.
The Fed’s next policy meeting is scheduled for March 19-20, during which it will release its latest “dot plot” survey showing officials’ projections for interest rates, inflation and unemployment.