Another warning for US stock indices

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US stock indices fell sharply yesterday following yet another hotter-than-expected inflation reading. Headline CPI for March jumped to 3.5% year-on-year, up from the 3.4% expected, and well above the 3.2% recorded in February. The latest reading is the highest since September’s 3.7%, and it has certainly rattled financial markets. Stock index futures sold off sharply, as did precious metals, while the US dollar soared. The yield on the US 10-year Treasury note jumped 18 basis points to hit its highest level since mid-November last year. Investors are once again recalibrating the probabilities of rate cuts this year. Having initially forecast six 25 basis point rate cuts in 2024, investors had recently reduced their forecasts to a maximum of three cuts. But now two seems more likely, if that. And it looks as if we may have to wait until September to get the first, rather than June as previously forecast. Having fallen steadily from a peak of 9.1% in the summer of 2022, Headline CPI hit 3.0% in June last year. But it has moved sideways ever since. Worse than that, ‘supercore’ inflation has become a major talking point. ‘Supercore’ strips out items considered temporary influences including food, energy, shelter and rent costs. It rose to +4.8% year-on-year yesterday, its highest level in eleven months. The problem is that items in ‘supercore’ items such as property taxes, car and home insurance, are non-discretionary, and therefore very difficult to shift lower, even by raising rates. We also saw the minutes of last month’s Fed meeting. The key takeaway was that Fed members believe that rates have peaked, with the first cut likely in the second half of this year. Whether this remains the case is something we’ll discover soon perhaps.

All the major US indices closed off their lows, yesterday but they were weaker first thing this morning. We got some relief from a benign update on wholesale inflation in the form of the Producer Prices Index before the US open. The news helped to lift all the US majors off their lows. Despite this, the bulls remain anxious given the current stock market weakness. The sell-off is yet another wake up call for investors who have become habituated to stocks only going up. While it has come as a shock to many, it hasn’t done any significant structural damage to the bullish technical set-up, yet. But should the selling continue tomorrow and ahead of the weekend, it could be enough to sour sentiment and persuade investors to cut their long-side exposure.