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Stock Market Slums on Disappointing US CPI

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  • Monthly consumer price index surprisingly accelerated in January.
  • Probability of rate cuts in the first half of the year diminished markedly.
  • Disappointing inflation data sparked meltdown in equity markets.

The consumer price index (CPI) rose more-than-expected in January as shelter costs, which accounts for one-thirds of the index and healthcare picked up. The underlying CPI accelerated 0.3% last month, up from 0.2% reading in December, according to the Bureau of Labour Statistics. On an annual basis the CPI increased 3.1%, down from 3.4% in December. Both metrics came above market expectations of 0.2% monthly and 2.9% annual rise.

The monthly core CPI which excludes the volatile food and energy prices increased 0.4% from 0.3% the prior month. The annual core CPI came up 3.9% and remained unchanged from December. Both readings exceeded market expectations of 0.3% a 3.5% rise respectively.

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Source: TradingView, Bureau of Labour Statistics, Inflation Rate YoY

While inflation is broadly moderating from its peak of 9.1% in June 2022, the path to the Fed’s target of 2% may be bumpy. The increase in prices in January was the largest over the past four months amid robust labour market and resilient economy. While the higher readings are disappointing, businesses usually increase their prices at the beginning of the year, making January usually a strong month for inflation.

In our view, the longer-term trend of moderating inflation is intact, and the January data is insufficient to suggest a resurgence in inflation. Also, not all of the components that drove inflation higher in January would go in the calculation of the personal consumption expenditures index (PCE), which is the Fed’s preferred measure of inflation.

Nonetheless, the disappointing CPI report together with the latest strong non-farm payroll report, triggered market repricing of rate cut expectations to fall to 90 basis points(bps) from 160 bps at the end of 2023.

After the hotter-than-expected inflation data, the slim chances that the Fed could start lowering interest rates in the first half of the year have diminished further. A March rate cut is now completely ruled out, while hopes for a cut in May decreased markedly. According to the CME FedWatch Tool the odds for a March rate cut are now at 8%, while the probabilities for a cut in May declined to 32%.

A graph of stock market

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Source: TradingView

Equity markets nosedived on Tuesday as the disappointing inflation data report dampened investors’ hopes of a rate cut in May, just a day after stock indices posted fresh record highs. Investors were widely expecting four to five interest rate cuts in 2024 according to the CME FedWatch Tool, while Fed officials have been repeatedly reinforcing that the central bank envisions three rate cuts at the most.

Markets ignored the Fed’s warnings that rates are staying higher for longer and have created the biggest discrepancy between policymakers and investors expectations. The latest CPI report threw a backet of cold water on these expectations and respectively on the market rally which has been unfolding almost uninterruptedly over the past fifteen weeks.

The relentless rally pushed the benchmark U.S. index to an all-time high of 5,048 on Monday, marking a gain of 23% since its October low. On Tuesday the market tanked 1.4% and the pull back is likely to extend further in the short-term as we see signs of exhaustion in momentum. A triple bearish divergence between the price and the Relative Strength Index (RSI) has formed over the past two months suggesting that the rally is losing steam, which points to a potential deeper pull back in the short-term.

Active traders looking to gain leveraged exposure to the index may consider our +5x Long US 500 and -3x Short US 500 ETPs.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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Sandeep Rao

Research

Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Julian Manoilov

Marketing Lead

Julian joined Leverage Shares in 2018 as part of the company’s primary expansion in Eastern Europe. He is responsible for web content and raising brand awareness.

Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.

Violeta Todorova

Senior Research

Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

Oktay Kavrak

Head of Communications and Strategy

Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined Leverage Shares from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.

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