Hot Inflation Hinders Market Rally

Inflation surged higher in April, with the Consumer Price Index (CPI) jumping 3.8 per cent from 3.3 per cent in March and the Producer Price Index (PPI) up six per cent from four per cent in March. The increase in the CPI owed much to energy and food prices. Energy prices have climbed nearly 18 per cent over the last year, while food prices registered their largest monthly gain since August 2022. But even outside of the volatile food and energy segments, housing, apparel, and airline fares also pushed higher. The PPI also felt the sting of higher energy costs. Machinery and equipment prices also jumped.

Higher inflation pushed bond yields to levels not seen in nearly a year. The benchmark 10-year Treasury yield jumped to 4.59 per cent, while the 30-year Treasury yield hit 5.11 per cent – both marking their highest level since May 2025. Higher bond yields mean lower bond prices, as evidenced by the dip in the Bloomberg Aggregate Bond Index which has lost 0.7% since the year began. Inflation concerns erased virtually any chance of a near-term interest-rate cut by the Federal Reserve. New Fed Chair Kevin Warsh will be under pressure from President Trump to lower rates, but the macro environment is unlikely to be conducive to that. Indeed, the odds of a rate cut before year-end have declined to less than one per cent, while the odds of a rate hike have spiked to 51 per cent. Bond yields also pushed higher overseas: the 10-year Japanese government bond yield hit its highest level in 27 years, and the German 10-year bond yield reached its highest mark since May 2011.

Stocks felt the impact globally. The S&P 500 and the NASDAQ both sold off after reaching record highs earlier in the week. Debt-laden growth stocks, which had rallied over the last month, and rate-sensitive utility stocks slumped, with technology stocks sliding one per cent on Friday and the utility sector dropping two per cent. The MSCI All-Country World Index (ex US) slipped more than two per cent. And investors in select stocks who had been banking on positive news from the US-China summit got less from the meetings than they had hoped. Boeing shares sunk after a jet order by China came in lighter than expected, while Deere slid lower as details on new agricultural trade deals were lacking.

Markets now turn their attention to the tail-end of earnings season. The report from tech giant Nvidia (NVDA) will showcase the strength of the ongoing AI spending boom, and Home Depot and Target will provide a look at consumer spending. Positive reports from all three could get the market rally back on track.