Stocks Bounce After a Rough CPI Day as Yields Fall

Wall Street traders, grappling with an unexpected uptick in U.S. inflation, witnessed a rebound in both stocks and bonds on Wednesday. The previous session had seen a decline triggered by a recalibration of Federal Reserve rate-cut expectations, a move further magnified by shifts in the derivatives markets. The VIX, the market's favored volatility indicator, saw a notable drop after reaching its highest level since November. Treasuries also saw gains, primarily driven by shorter maturities.

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Jeremy Straub of Coastal Wealth noted, "Investors should expect continued volatility as the market sorts out the continued uncertainty over how the Federal Reserve will respond to the ongoing inflation situation. The stock market never moves higher without fits and starts along the way."

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Austan Goolsbee, President of the Federal Reserve Bank of Chicago, provided reassurance, stating that slightly higher inflation for a few months would still align with the central bank's goal of returning to a 2% target. Traders are now pricing in only three Fed rate cuts for the year, with approximately a 70% chance of a fourth reduction. This aligns with the central bank's forecast for three easing moves.

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The S&P 500 approached the significant 5,000 mark, and the Nasdaq 100, which is heavily weighted towards technology stocks, saw an almost 1% increase. Chipmaker Nvidia Corp. led a rally in the tech sector, while Uber Technologies Inc. surged by 12% on its announcement of plans to repurchase up to $7 billion in shares. Meanwhile, Treasury 10-year yields fell by three basis points to 4.28%, and the dollar experienced fluctuations. Bitcoin, in a separate market move, climbed past $51,000.

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Matt Maley at Miller Tabak + Co. acknowledged that the bounce in the stock market provided relief from Tuesday's concerns. However, he highlighted that Treasury yields remained at or near recent highs, cautioning that a failure to see a rapid decline in yields could create impactful headwinds for the stock market.

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A Bloomberg index tracking global debt has declined by 3.5% this year, erasing all gains since December 12, the day before the Fed's announcement that month. Slower-than-expected UK inflation numbers for January provided some respite to Treasuries on Wednesday, resulting in a decrease in the U.S. 10-year yield after the previous day's 14-basis-point surge.

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Chris Senyek at Wolfe Research views the current market as a "show me" story. He suggests that for the market to undergo an official correction, investors will need additional evidence that the Fed won't align with expectations for rate cuts or that the growth outlook is decelerating quickly enough to trigger recession fears.

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