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Inflation Rate Slows More Than Predicted In March: Markets Rally As The End Of Fed Hike Cycle Looms

The SPDR S&P 500 is volatile after the Labor Department reported a 5% year-over-year increase in the consumer price index

The SPDR S&P 500 is volatile Wednesday morning after the Labor Department reported a 5% year-over-year increase in the consumer price index (CPI) for March.

The headline CPI came in at 5% year-on-year in March, down from 6% in February, according to data the Labor Department reported on Tuesday. The closely watched inflation reading was below average economist estimates of 5.2%. This marked the lowest inflation print since May 2021. 

The NASDAQ MarketSite at Times Square on January 13, 2023, in New York City. NASDAQ and the S&P 500 pared losses on Friday on the back of easing inflation expectations and results from some U.S. banks. Investors are critical of a possible recession as the Federal Reserve is expected to raise the hikes next month. LEONARDO MUNOZ/BENZINGA

On a month-over-month basis, CPI was up 0.1%, which was also lower than the estimates of 0.2%.

Core CPI, which excludes volatile food and energy prices, matched expectations on a year-over-year basis, rising 5.6%. On a month-over-month basis core inflation rose 0.4% also in line with estimates. 

The Labor Department said energy prices were up 6.4% year-over-year, while food prices climbed 8.5%.

The March inflation report eased worries about a prolonged Fed rate hike cycle, as price pressures start to cool. However, core inflation remains high and this could keep the Fed maintaining elevated interest rates for an extended period of time.

Prior to the CPI release, the market was pricing in the Fed funds rate peaking in May and then dropping as low as 4.2% by January 2024.

“It increasingly feels like equities are caught in a channel. One that most believe (and are positioned) to see break on the downside and yet never seemingly does,” Bobby Molavi, a managing director at Goldman, wrote in a note on Friday. “The prevalent view seems to be that more things will break on the back of rapid rise in cost of capital.”

The Federal Reserve is expected to raise the interest rates next month. Stock have pulled back for a third session in four as the Treasury yield climbs.

Fed futures presently assign a likelihood of 75% of a 25-basis-point raise in May and a probability of 66% of rates being on hold in June, according to the latest CME Group Fedwatch. 

Futures on the S&P 500 index edged up by 0.9%, while those on the NASDAQ 100 rose by 1%. 

Yields on the 10-year Treasury Note eased to 3.55%, down 7 basis points, and the two-year yield reached 3.9%, down 11 basis points.

The U.S. dollar index weakened 0.6%, with the EUR/USD pair rising 0.6% to 1.0975.

Gold trended 1% higher as investors reevaluated the Fed’s rate path, with the bullion trading at $2,026/oz. Silver rose 2% to $25.57/oz. 

The unemployment rate remains at an all-time low at 3.5% during the month of March.

“There are clear benefits to the speed of this recovery,” Nick Bunker said, economic research director at Indeed Hiring Lab. “Speed is great because it gets you to your destination, but it can be unsettling because there’s a whiplash.”

Investors are in fear of a potential recession as policymakers weighed in banking stress that included economic activity and hiring employees.

Produced in association with Benzinga

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