Wall Street experienced a sharp decline as concerns about the potential impact of U.S. tariffs on inflation and economic growth overshadowed the latest economic data. The disappointing figures reinforced fears that the Federal Reserve may not lower interest rates anytime soon, causing traders to rethink their expectations.
The S&P 500 dropped by about 1%, erasing earlier gains from the week. President Donald Trump announced plans to introduce reciprocal tariffs next week, escalating his trade war. This news sent shockwaves through the market, with U.S. Steel Corp. suffering a decline after Trump mentioned that Nippon Steel Corp. might invest in the company instead of purchasing it outright. Additionally, stock prices fell as consumer sentiment dropped due to inflation concerns, and mixed jobs data indicated a cooling labor market, though wages increased.
Economic Data Points to Inflation Concerns
The latest economic reports highlighted that inflation pressures remain a key worry for traders. These concerns have led market experts to believe that the Federal Reserve will maintain its current interest rates, especially after three rate cuts last year. While traders still speculate on future rate cuts, the expectation for the next move is now set for September.
Seema Shah, an economist at Principal Asset Management, noted, “The broader picture is still one of labor market resilience and sustained wage pressures. This gives the Fed little reason to cut policy rates immediately.”
Losses in Key Indices
The Nasdaq 100 fell 1.3%, and the Dow Jones Industrial Average lost 1%. A measure of the “Magnificent Seven” tech stocks dropped by 2%, with Amazon losing nearly 4% after issuing a disappointing forecast for its cloud business. Roblox Corp. is also under investigation by the U.S. Securities and Exchange Commission, further dampening market sentiment.
The yield on 10-year Treasuries rose by five basis points to 4.49%, while the Bloomberg Dollar Spot Index gained 0.2%.
Mixed Jobs Data and Rising Wages
The January jobs report revealed that nonfarm payrolls increased by 143,000 last month, with upward revisions to prior months. However, the job gains were slower than originally reported, averaging 166,000 per month last year, down from an initial estimate of 186,000. The unemployment rate remained at 4%, with hourly wages climbing by 0.5%.
Bret Kenwell from eToro highlighted that strong wage growth benefits workers but could contribute to inflation. “While some investors may worry about implications for inflation or rate cuts, it’s better to have a strong economy and labor market than a deteriorating environment,” Kenwell added.
Fed’s Outlook on Inflation and Interest Rates
Despite concerns over inflation, Neil Dutta at Renaissance Macro Research stated that the Fed may not rush to cut rates. He pointed to sluggish sectors in the labor market, such as manufacturing, as evidence that high interest rates are taking a toll. However, the low unemployment rate may keep the Fed from acting quickly.
Fed Governor Adriana Kugler emphasized that it’s appropriate to maintain the current benchmark interest rate, considering the stable labor market and ongoing inflation challenges. Minneapolis Fed President Neel Kashkari also predicted that inflation will ease toward the 2% target by the end of the year, which could allow for modest rate cuts.
Fed’s Patience Expected to Continue
Goldman Sachs Asset Management’s Lindsay Rosner believes that the Fed will continue to proceed cautiously with rate cuts. “The Fed should feel quite cozy sitting tight the rest of winter, knowing it made the right decision to pause rate cuts,” said Charlie Ripley at Allianz Investment Management.
Economists, including Jason Pride from Glenmede, expect the Fed to push out its rate cut timeline further after reviewing upcoming inflation and employment data. Mark Hamrick from Bankrate added that the Fed is likely to remain patient before making any further interest rate moves.
Upcoming Inflation Data
Looking ahead, the U.S. Consumer Price Index (CPI) for January will be a key indicator for the Fed’s inflation strategy. According to Guneet Dhingra at BNP Paribas, CPI has historically surprised on the upside in January, which could lead to higher yields. However, a downside surprise would be considered positive for markets and inflation.
Corporate Highlights
Several major companies made headlines this week:
Amazon warned of potential capacity constraints in its cloud computing division despite plans to invest $100 billion this year in data centers and AI infrastructure.
Apple is preparing to unveil a revamped iPhone SE, aiming to capture a larger share of the lower-cost smartphone market.
Pinterest posted strong holiday-quarter revenue and gave an optimistic sales forecast for the upcoming quarter, despite competition from larger rivals.
Cloudflare reported stronger-than-expected fourth-quarter results, exceeding market expectations.
Expedia Group saw better-than-expected bookings, reflecting strong travel demand during the winter holiday season.
Nikola Corp. is considering bankruptcy after a turbulent period of fluctuating stock prices and internal challenges.
In the Week Ahead: The January CPI report and retail sales data are expected to provide further insights into the inflationary pressures facing the economy, which could influence the Fed’s next steps.
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