Dow Jones declines as inflation fears pummel risk appetite – Crypto News – Crypto News
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CPI shocks again, so is it time for a 100bps rate hike? CPI shocks again, so is it time for a 100bps rate hike?

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Dow Jones declines as inflation fears pummel risk appetite – Crypto News

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1 year ago

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  • Dow Jones tumbles as inflation concerns return to cloud rate cut hopes.
  • US wage pressures increased, driving fresh inflation fears.
  • Dow Jones backslides 400 points, falls below 38,000.

The Dow Jones Industrial Average (DJIA) declined alongside the other major US equity indexes as risk aversion strikes again just ahead of Wednesday’s latest Federal Reserve (Fed) rate call. The Fed’s two-day rate decision meetings started today, and investors are balking as the Fed kicks off rate discussions with a fresh batch of data suggesting inflation remains a sticky problem for the US.

US wage pressures and housing costs remain inflation risk

The US Employment Cost Index for the first quarter rose 1.2% QoQ, accelerating from the forecast uptick to 1.0% and the previous quarter’s 0.9%. The US S&P/Case-Shiller Home Price Indices for the year ended February rose 7.3%, above the forecast 6.7% and accelerating from the previous period’s 6.6%.

The Chicago Purchasing Managers Index (PMI) in April also fell to nearly a two-year low of 37.9, sharply lower than the forecast 44.9 and the previous month’s 41.4. The Consumer Board’s Consumer Confidence Index also declined to its lowest reading since July of 2022, falling to 97.0 from the previous month’s 103.1 (revised down from 104.7).

With housing inflation and wage growth continuing to outrun forecasts and expectations, hopes for near-term rate cuts from the Fed are evaporating, knocking risk appetite down at the knees. The Fed’s latest rate call is slated for 18:00 GMT on Wednesday, followed by a press conference at 18:30 and headed by Fed Chair Jerome Powell.

Dow Jones news

Market hopes for 2024 rate cuts have fallen steeply in the first half of the year. Investors kicked off January expecting around six rate cuts from the Fed through the year, and Tuesday’s inflation figures have knocked rate cut expectations all the way down to a single 25-basis-point cut in 2024. Markets now see a 51% chance of no rate cut in September, making November the current market favorite bet for a first rate trim.

Nearly all of the securities that make up the Dow Jones are in the red on Tuesday, with the only notable gainer in 3M Co. (MMM), which is up around 3.5% on the day after the company posted better-than-expected earnings. MMM is trading into $95.34 per share. Tuesday’s worst DJIA security is Caterpillar Inc. (CAT), which backslid nearly 4$ and traded down 13 points into $337.00 per share.

Dow Jones technical outlook

The Dow Jones set an early high of 38,385.32 on Tuesday before risk aversion gripped investors, dragging the DJIA down to a low of 37,943.04. The major equity index is poised for further declines after breaking down below the 38,000.00 price handle.

The Dow Jones faces a technical rejection from the 200-hour Exponential Moving Average (EMA) at 38,337.24. Downside pressures are clear until the last near-term swing low into 37,750.00, while the index remains down 1.3% from last week’s peak bids near 38,550.00.

Dow Jones five-minute chart

Dow Jones daily chart

Inflation FAQs

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

 

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