Markets Drop as Geopolitics and Inflation Heat Up

by Sequoia Financial Group
by Sequoia Financial Group

Markets traded within a narrow range on Monday as they continued to process the impact of last Friday’s robust jobs report, which pushed Treasury yields higher. Despite a recent surge in commodity prices counteracting the disinflationary trend, the solid backdrop of US economic growth likely dissuades the Federal Reserve from cutting rates. The New York Fed’s latest Survey of Consumer Expectations showed that one-year inflation expectations remained steady at 3% for the third consecutive month.1 However, median year-ahead expected price changes increased across all surveyed goods. 1

Equity markets closed slightly higher on Tuesday as investors adopted a wait-and-see approach with key events such as CPI data and bank earnings due later in the week. Small business optimism, as measured by the National Federation of Independent Businesses (NFIB) index, declined to 88.5, its lowest level since December 2012.2

Wednesday saw a sharp decline in equity markets after the release of the CPI report. March’s headline CPI increased by 0.4% month on month, surpassing estimates of 0.3%, while core CPI rose 0.4%, higher than estimates of 0.3%.3 Annualized headline CPI and core CPI also exceeded estimates. 3 The primary drivers of the month-on-month increase were shelter and gasoline prices, but core services such as transportation and medical care also saw rises. 3 A weak 10-year Treasury auction exacerbated rate pressures, with 10-year yields surpassing 4.5% for the first time since November. The likelihood of a June rate cut dropped to 21%, down from 60% prior to the CPI release. Elsewhere, crude oil prices surged after reports of potential missile strikes on Israel by Iran and its allies.

Thursday brought some relief to the markets as the headline PPI for March came in slightly lower than expected at 0.2% and core PPI met consensus at 0.2%.4 Final demand goods prices decreased by 0.1%, primarily due to a 1.6% drop in the energy prices index, while services rose by 0.3%.4 This cooler-than-expected PPI report contributed to a rebound in the markets, which ended the day just shy of their highest levels.

However, the positive sentiment didn’t last – equities fell sharply on Friday. The Dow and the S&P 500 logged their second consecutive week of losses, while the NASDAQ recorded its third straight week of declines. Big tech stocks led the downturn, with many growth and momentum stocks giving back gains from the previous day. Heightened geopolitical tensions, particularly surrounding potential Iranian missile strikes on Israel, fueled risk-off sentiment, driving investors towards safety assets like Treasuries.5 Additionally, banks faced downward pressure following earnings reports from JPMorgan Chase, Wells Fargo, Citigroup, and BlackRock. In general, the sector was lower on weak net interest income and expense guidance.




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