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Inflation Surprises Drive Stocks Down and Treasury Yields Up, Shaking Confidence in Federal Rate Cuts

On Tuesday, stock markets experienced a decline following the release of inflation data for January that exceeded forecasts, causing a surge in Treasury yields. This development cast uncertainty over the Federal Reserve's ability to implement multiple rate cuts this year, which had been a crucial argument for those optimistic about the stock market's prospects.


The Dow Jones Industrial Average dropped by 443 points or 1.2%, having earlier fallen over 500 points or 1.4%, marking its most significant decline since March 2023, when it decreased by 1.63%. Similarly, the S&P 500 and the Nasdaq Composite both saw declines of 1.2% and 1.4%, respectively.


January's consumer price index (CPI) saw a 0.3% increase from December and a 3.1% rise on an annual basis, surpassing the expectations of economists who had predicted a 0.2% monthly increase and a 2.9% annual rise. Core CPI, which excludes the more volatile food and energy sectors, rose by 0.4% from the previous month and 3.9% from the previous year, again exceeding expectations of a 0.3% monthly and 3.7% annual increase.


Art Hogan, chief market strategist at B. Riley Financial, commented that the slightly higher-than-expected CPI might serve as a justification for adjusting the overly optimistic market, which has seen consistent gains this year. He noted that the path indicated by the CPI data shows variability, although it suggests a general trend of decrease.


Following the inflation report, the yield on 2-year Treasuries exceeded 4.6%, and the yield on 10-year Treasuries went over 4.27%. Notably, technology stocks like Microsoft and Amazon, which had previously led the market to record highs amid falling rates, were among the biggest losers on Tuesday, both dropping by 1.4%.


In other financial news, JetBlue Airways saw a 12% increase after activist investor Carl Icahn disclosed a nearly 10% ownership stake in the company. Conversely, Hasbro experienced a 6% decrease after its fourth-quarter earnings failed to meet analysts' forecasts, and Avis Budget Group's shares declined by 20% following disappointing fourth-quarter revenue reports.


In a notable deviation from the broader market trend, Nvidia's shares increased by 1% on Tuesday, showing resilience against the general weakness in the technology sector as yields continued to rise. The company, which is set to report its earnings next week, has seen its stock rise nearly 47% year to date, with an 18% increase this month, as Wall Street's interest in artificial intelligence and growth prospects intensifies.


Additionally, the 10-year Treasury yield reached a new high for 2024 at 4.27% after the inflation report, a significant increase from the end of 2023 when it stood at 3.88%. This rise in yields reflects growing skepticism regarding the Federal Reserve's capacity to lower borrowing costs to the extent that investors had previously hoped, especially after Federal Reserve Chair Jerome Powell moderated expectations for rate cuts.

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