US equities declined dramatically on Friday, with the tech-heavy Nasdaq 100 index dropping nearly 2% after the US opening bell as investors assessed the recent inflation data.
Inflation stays hot
As measured by the Personal Consumption Expenditures (PCE) Price Index, inflation in the United States increased to 5.4% in January from 5.3% in December, the Bureau of Economic Analysis announced on Friday. This reading surpassed the market’s forecast of 4.9%.
The Federal Reserve’s chosen measure of inflation, the annual Core PCE Price Index, increased to 4.7% from 4.6% in the same period, above experts’ expectations of 4.3%. Core PCE inflation and PCE inflation both gained 0.6% on a monthly basis.
Furthermore, in January, personal income climbed by 0.6% on a monthly basis, while personal expenditure increased by 1.8%, according to the data.
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Even while prices have stabilized from the current inflation cycle’s high, the statistics confirm recent indicators that inflation is not decreasing at the speed and scale investors had hoped for.
3x rate hikes priced in
As a result, projections for the Fed’s terminal rate have risen to 5.39%, while those for a rate cut in the second half of 2023 have fallen to single digits (just nine bps priced in).
The market is now pricing in 3 x 25 bps rate-hikes at the following three FOMC meetings, with the probability of a 50 bps hike in March increasing to around 25% (and a 25 bps rise entirely priced in for March).
Elsewhere, Reuters reported that Cleveland Fed President Loretta Mester told CNBC on Friday that the convergence between the financial markets and the Fed’s policy stance is considerably closer than it was previously.
“My funds’ rate was above the median in December, and I continue to believe that we need to be somewhat over 5%,” Mester said, adding that she does not believe a compromise between labor and price stability is necessary.
The Nasdaq 100 is correcting downward, but Credit Suisse economists anticipate that crucial supports at $11,912/699 will hold.
“We look for a clear and sustained break above $12,856 post this setback and some further consolidation. We would then see resistance next at 13,175, ahead of the 50% retracement and summer 2022 highs at $13,603/721,” they said.
Below their mentioned support of $11,912/699, the scope is for a more significant decline, targeting $11,550 or $11,200.
Nasdaq index daily chart, source: author´s analysis, tradingview.com