Stocks in the United States and Europe slumped on Tuesday while the dollar climbed as data showed that US inflation slowed less than expected in January, diminishing the chances of an early interest rate cut.
Jerrymusa.com reports that the Department of Labour said that the widely monitored Consumer Price Index (CPI) increased 3.1% in January compared to a year ago, down from 3.4% in December.
However, economists had predicted that the rate might drop below 3.0%. In the meantime, the “core” CPI data, which is more significant to policymakers and does not include volatile food and energy costs, remained stable at a 3.9% annual increase.
As the rate of price increases gets closer to its 2.0 percent objective, the US Federal Reserve, which started hiking interest rates in 2022 to rein in soaring inflation, has hinted that it will probably start cutting them later this year. This has made investors pay closer attention to US inflation data.
January Inflation Hits Hard
“The inflation data for January arrived in hot overall, which could frighten investors following a significant surge in the previous few months, according to Etoro analyst Bret Kenwell.
In recent months, stocks have surged to all-time highs as investors have bet on a decline in interest rates to boost company profits. “The US IT sector has also performed spectacularly due to the explosion of artificial intelligence.”
The hotter-than-expected CPI may give investors an excuse to take profits in a market that many feel is overbought on a short-term basis,” stated Patrick O’Hare. “The major indexes on Wall Street had a decline of over one percent, with the Dow down 1.1% from its peak.
Europe’s stock market closed nearly 1%. The biggest economy in the world’s CPI figure on Tuesday had traders expecting the Federal Reserve to be able to cut interest rates.
“While downplaying the possibility of a March rate drop, which the market had been expecting, Fed Chairman Jerome Powell stated last month that the US central bank would start reducing interest rates later this year if the trend of declining inflation continued.”
According to market analyst Axel Rudolph of the online trading platform IG, “hopes for a Fed March rate cut have all but disappeared, with the market now pricing in a 53 percent probability of a first cut being seen in June.”
The majority of Asia went back to work following a long weekend. “Tokyo led gains as a result of a spike in SoftBank’s (a Japanese investment group) stock, which was bolstered by another record-breaking day for its Arm chip design, which is traded in the US.
“Arm’s valuation has nearly tripled since its September debut and nearly doubled over the last week, thanks to strong semiconductor demand driven by the anticipated growth in artificial intelligence.”
“For the first time since late 2021, Bitcoin crossed $50,000 on Monday as investors became more confident that further US approval of the cryptocurrency would increase demand.”
Expectations that US lawmakers would approve the establishment of exchange-traded funds (ETFs) that follow the price of cryptocurrencies and allow the general public to invest in them without having to buy them directly have contributed to the recent surge in the price of cryptocurrencies.
Following the initial dip, bitcoin has increased by almost 25% since January 22.