by Carolina Mandl, Johann M Cherian and Ankika Biswas

(Reuters) – The New York Stock Exchange ended sharply lower on Tuesday as data on inflation in the United States, higher than expected, dampened the markets’ hopes of seeing the Federal Reserve (Fed) take action soon to see a first drop in interest rates, a situation which has benefited bond yields.

The Dow Jones index lost 1.36%, or 522.05 points, to 38,275.33 points.

The broader S&P-500 lost 68.14 points, or 1.37%, to 4,953.70 points.

The Nasdaq Composite fell 282.64 points (1.79%) to 15,659.91 points.

A report published today by the US Department of Labor shows that consumer prices rose more than expected in January, driven by an increase in rents.

“Many Fed officials have spoken out over the past two weeks to suggest that the (rate) cuts markets are expecting in the first half of the year may be premature. Consumer price data clearly reinforces this picture “, commented Bob Elliott, chief investment officer at Unlimited Funds.

The hypothesis that the Fed will begin easing its monetary policy in May has carried the main Wall Street indices at the start of the year, the S&P-500 having multiplied the closing records and exceeded the threshold of 5,000 for the first time points last week.

But after the release of consumer price data, only a minority of traders continue to bet on a first rate cut in May – 36.1% compared to around 58% previously, according to CME FedWatch. This drop is now expected in June.

The Dow recorded its largest one-day percentage decline since March 2023.

The CBOE Volatility Index, considered a gauge of the level of fear on Wall Street, rose to its highest level since last November.

High-growth stocks like Microsoft, Alphabet, Amazon and Meta Platforms, which are sensitive to interest rates, fell. Several semiconductor manufacturers also ended up in the red.

At the same time, US Treasury yields rose to two-month highs.

“The market mood has had a wake-up call. There’s no escaping the fact that the Fed may need to be more cautious,” said Lara Rhame, chief economist at FS Investments, as Investors had been briefly reassured by the trajectory of inflation in the last quarter of 2023.

Among the major S&P-500 sectors, real estate and utilities suffered the biggest declines of the day, with real estate falling to a two-month low.

On the value side, note that JetBlue Airways jumped 21.6% after activist investor Carl Icahn announced a 9.91% stake in the airline and deemed it “undervalued”. Tripadvisor rose 13.8% following the announcement of the establishment of a special committee responsible for studying possible takeover offers.

(Written by Jean Terzian)

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