Markets at Midday: Shaky Start but Potential for V-Bottom Turnaround is Present
2min read The stock market faced a difficult start to the trading session on September 11, 2024, as investors digested fresh economic data and ongoing macroeconomic challenges.
The key focus of the day has been the release of the August Consumer Price Index (CPI), which indicated persistent inflationary pressures, particularly within core inflation, and the broader implications for Federal Reserve policy.
Core CPI Data Points to Sticky Inflation
The market's reaction to the August CPI data has been marked by uncertainty and cautious sentiment. While headline CPI rose 2.5% year-over-year, core CPI, which excludes food and energy, remained unchanged at 3.2%.
This level is well above the Federal Reserve's 2.0% inflation target, which is more closely aligned with the Personal Consumption Expenditures (PCE) Price Index.
This persistence in core inflation has effectively reduced the likelihood of a more aggressive monetary policy stance from the Federal Reserve.
The fed funds futures market, which gauges market expectations for Fed policy actions, has lowered the probability of a 50-basis point rate cut at the September Federal Open Market Committee (FOMC) meeting from 34.0% to just 15.0%. Instead, a 25-basis point cut appears to be the base case, aligning with expectations for a more measured approach given the mixed inflation landscape.
Market Response and Sector Performance
The CPI report provided an impetus for early selling pressure in the stock market. The broader negative sentiment has been compounded by other factors, such as the reverberations from the previous night's presidential debate and comments from financial institutions highlighting emerging challenges.
Ally Financial's acknowledgment of intensifying credit challenges, coupled with JPMorgan Chase's warning about overly optimistic 2025 net interest income expectations, has weighed heavily on the financial sector.
As a result, the financial sector is the day's worst performer, down 1.9%. This decline reflects concerns that rising credit costs and tighter margins could dampen profitability in the coming quarters.
In addition to financials, other sectors facing significant headwinds include energy (-1.4%), consumer staples (-1.4%), materials (-1.3%), real estate (-1.3%), consumer discretionary (-1.3%), and industrials (-1.3%).
The energy sector, in particular, continues to struggle amid sliding oil prices, with WTI crude oil futures falling to $65.85 per barrel, down 4.1% on the day. The materials sector is feeling the pressure from declining commodity prices, including copper, which fell by 1.1% to $4.10 per pound.
Bright Spots in a Downbeat Market
Amid the broader market decline, NVIDIA (NVDA) is a notable outlier, providing some support to the technology sector. NVIDIA shares are up 2.5% as the company continues to benefit from strong demand in the semiconductor space, which remains a bright spot despite broader economic uncertainties.
The strength in NVIDIA, along with gains in a handful of other tech components, has lifted the information technology sector by 0.3%, making it the only sector to register gains today.
Treasury yields have experienced volatility following the CPI release. The 2-year note yield moved from 3.55% to 3.69% before settling at 3.63%, up two basis points.
Meanwhile, the 10-year note yield, which provides insight into long-term inflation and growth expectations, has seen similar movement, initially rising from 3.61% to 3.69% before stabilizing at 3.65%.
Market Indices and Broader Outlook
The major indices reflect the day's cautious tone. The Nasdaq Composite is down 0.3%, benefiting partially from the relative strength in the technology sector. However, the S&P 500 has fallen 0.9%, while the Russell 2000 and Dow Jones Industrial Average are down 1.0% and 1.2%, respectively.
The broader market shows a skew towards negative sentiment, with declining issues outnumbering advancing ones.
Conclusion: Navigating the Road Ahead
The mixed inflation data has put the Federal Reserve in a challenging position, balancing the need to maintain price stability against the potential economic fallout from overly restrictive monetary policy.
While the core-CPI data supports the case for a more modest 25-basis point rate cut at the upcoming FOMC meeting, the persistence of inflationary pressures suggests that the path to price stability remains uncertain.
Investors should continue to monitor key economic indicators, including inflation, labor market dynamics, and corporate earnings, to better understand the broader economic outlook.
Market participants will also be closely watching upcoming events, including the Fed's September meeting and corporate guidance for the next quarter, to gauge the potential for further volatility and adjust their investment strategies accordingly.