A frothy stock market suffered a steep fall Tuesday, as an unexpectedly hot January consumer-price index reading reminded investors that the Federal Reserve\u2019s long-fought battle against inflation isn\u2019t yet won.<\/p>\n
\u201cThe markets just went too far, too fast and the Fed\u2019s reality is setting in right now,\u201d said Kent Engelke, chief economic strategist and managing director at Capitol Securities Management, in a phone interview.<\/p>\n
Reality can be painful. The Dow Jones Industrial Average Treasurys sold off sharply, sending yields, which move in the opposite direction to bond prices, soaring as traders recalibrated rate-cut expectations. The yield on the 2-year Treasury The consumer-price index rose 0.3% in January, with the year-over-year rate falling to 3.1% from 3.4% a month earlier. The core rate \u2014 which excludes volatile food and energy costs \u2014 rose 0.4%, a tick above Wall Street expectations, leaving the year-over-year core rate unchanged from December at 3.9%<\/a>.<\/p>\n Investors were reminded that CPI release days can be volatile. All three major indexes had their worst performance on a CPI day since Sept. 13, 2022, according to Dow Jones Market Data.<\/p>\n Read more:<\/strong> Dow drops after \u2018ugly\u2019 inflation report upsets market\u2019s rate-cut expectations<\/a><\/p>\n <\/p>\n The problem is that investors had thought inflation worries were in the rearview mirror, pricing in as many as six quarter-point rate cuts by the Federal Reserve this year and driving the S&P 500 The Fed, of course, had been pushing back against those expectations. The dot-plot forecast had penciled in only three rate cuts in 2024, and Fed Chair Jerome Powell and other officials had consistently urged against the notion that rate cuts could come as early as March.<\/p>\n Fed-funds futures traders have now all but abandoned the prospects of a March rate cut, while pricing in a roughly 37% chance of at least a quarter-point cut by the Fed\u2019s May meeting \u2014 down from more than 60% on Monday and 100% a month ago. They now see just over a 50% probability of a total of four quarter-point cuts by the end of the year.<\/p>\n Some observers worried that further rounds of stubborn inflation data could force the Fed \u2014 which has so far signaled that it\u2019s next move will be a rate cut \u2014 and investors to change their tune altogether.<\/p>\n \u201cGiven that core CPI came in at 3.9% again \u2014 and didn\u2019t drop to 3.7%, which was the consensus forecast \u2014 then it not only throws the timing of Fed rate cuts into question, but potentially opens the door to a possibility that we haven\u2019t seen the last Fed rate hike in this cycle,\u201d said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, in emailed comments.<\/p>\n Others warned against reading too much into one month\u2019s data, but noted that the figures would clearly not be read as good news by Fed policymakers.<\/p>\n \u201cThe final mile towards the Fed\u2019s 2% target was always going to be slow, erratic and frustrating,\u201d said Seema Shah, chief global strategist at Principal Asset Management. \u201cToday\u2019s data is not what markets or the Fed would have liked to see, but it\u2019s important not to overreact and jump to the assumption that an inflationary resurgence is developing.\u201d<\/p>\n Capitol Securities\u2019 Engelke said stocks had \u201cdiscounted all the positives\u201d heading into Tuesday\u2019s data, leaving the market vulnerable to a sharp selloff that was likely exacerbated by algorithmic trading.<\/p>\n A near-term pullback could prove healthy for the rally, he added. Based on simple moving averages, a pullback to the 4,800-point level for the S&P 500 would seem reasonable, with 4,600 in sight if that line of support fails to hold.<\/p>\n A retreat on that order \u201cwould actually be healthy for the market to wring out the excesses,\u201d Engelke said. \u201cWe\u2019ve got to get complacency out of the market. \u2026 A couple big down days that leave the market down 5% or 8% in a week, and people get really scared.\u201d<\/p>\n<\/p><\/div>\n<\/div>\n
\n DJIA<\/a>
\n dropped nearly 760 points at its low and ended the day down roughly 525 points, or 1.4%. The S&P 500
\n SPX<\/a>
\n tumbled 1.4%, while the Nasdaq Composite
\n COMP<\/a>
\n shed 1.8%.<\/p>\n
\n BX:TMUBMUSD02Y<\/a>
\n jumped 18.7 basis points to 4.654%, its highest level since Dec. 12.<\/p>\n\n <\/div>
\n Dow Jones Market Data
\n <\/span>
\n <\/figcaption><\/figure>\n<\/p><\/div>\n
\n SPX<\/a>
\n above the 5,000-point milestone last week. At the same time, the Dow Jones Industrial Average
\n DJIA<\/a>
\n notched a string of record-high closes while the Nasdaq Composite
\n COMP<\/a>
\n approached its own record territory. <\/p>\n