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Yesterday saw a tumultuous day in the markets with investors reacting to a surprisingly high consumer price index (CPI) reading. The 0.4% rise in consumer prices pushed the annual increase to 3.5%, sparking concerns that potential interest rate cuts might be off the table for the year.
This worry of potential events spiraled into speculation about an imminent stock market crash. The prevailing sentiment is that the longer the Federal Reserve hesitates on rate reductions, the longer these apprehensions will persist.
However, today’s release of wholesale inflation data seems to be offering a slightly different narrative.
The Producer Price Index (PPI) for March showed a modest 0.2% uptick, falling short of the 0.3% economist consensus. This unexpected result is alleviating fears of a resurgent inflation and suggests that inflation remains under control.
Rising Concerns Amid Varied Inflation Figures
The economic storyline embraced by economists and investors is constantly evolving. The bond market transitioned from pricing in a 150-basis-point cut in interest rates at the start of the year to just 65 basis points yesterday, primarily due to persisting inflation. With inflation jogging above 2%, it is improbable that the Federal Reserve will act at its upcoming meetings.
Consequently, rate reductions are likely to be delayed. Some Fed members are even contemplating that rate cuts might not materialize until late this year, or possibly even into the next. Talks of a hike are gaining traction. Considering the economy’s sensitivity to interest rates, particularly in certain sectors, this outlook spells trouble for investors in those industries.
Potentially, we might witness continued pressures in sectors vulnerable to interest rates. The Fed’s reluctance to lower rates promptly could turn into a risky game, impacting job stability and economic growth over an extended period.
I wouldn’t go as far as predicting an imminent stock market crash or suggesting it’s more likely than a softer landing. Nonetheless, I reckon the likelihood of a crash heightens as the Fed places more weight on outdated data than on current inflation indicators such as prevailing rent rates.
On the day of publication, Chris MacDonald did not hold any positions in the securities discussed. The viewpoints expressed are solely those of the author, guided by the InvestorPlace.com Publishing Guidelines.
