Inflation Report Dampens Rate Cut Hopes, Shakes Markets and Resets Fed Expectations

Stocks and bonds took a hit as a higher-than-expected inflation report dampened hopes for Federal Reserve interest rate cuts this year. The S&P 500 fell roughly 1% following a consumer price index report that exceeded economists’ predictions for the third consecutive month, exacerbating April’s losses. Ten-year Treasury yields reached a critical 4.5% level, watched closely by investors as a potential indicator of revisiting 2023’s peak rates. With the bond market adjusting to a more hawkish stance, expectations have shifted to just two Fed rate cuts for the year.

As the Fed approaches its 2% inflation target, there’s growing concern among investors that recent inflationary pressures might persist, challenging the notion of a brief inflationary spike. This scenario underscores the possibility of sustained higher rates, with the S&P 500 dropping to about 5,150 and two-year Treasury yields, more reactive to Fed changes, jumping 20 basis points to 4.94%. The dollar is on track for its most significant gain since March 2023. March’s core CPI, excluding food and energy, rose 0.4% from February and 3.8% year-over-year, maintaining its previous rate.

Corporate Updates:

• Meta Platforms Inc. ( $META)  is integrating a newly developed chip to enhance its AI services and reduce dependency on Nvidia Corp. and other suppliers.
• Delta Air Lines Inc. ( $DAL) anticipates surpassing Wall Street predictions for Q2 earnings, driven by an increase in corporate travel and strong leisure demand.
• Macy’s Inc. ( $M) has appointed two directors nominated by activist investor Arkhouse Management Co., halting its campaign for majority board control in its bid to acquire the retailer.
• Apple Inc. ( $AAPL) reported $14 billion in iPhone production in India last fiscal year, signaling an acceleration in its strategy to diversify manufacturing beyond China.
• Taiwan Semiconductor Manufacturing Co. ( $TSM)  reported its fastest revenue growth in over a year, bolstering the view that the AI development boom is driving high-end chip and server demand.
• UBS Group AG ( $UBS) is facing significant hikes in regulatory capital requirements following proposed Swiss government reforms after Credit Suisse’s collapse.
• KKR & Co. ( $KKR) has outlined a strategy to expand its core operations, targeting at least $1 trillion in assets under management within five years.