Higher-for-Longer Rate Worries Resurface After U.S. Wholesale Inflation Accelerates

Barry Adams
14 Mar, 2024
New York City

Stocks on Wall Street turned lower, and tech stocks led the decliners as the early market gains evaporated on the worry of interest rates staying higher for longer. 

The S&P 500 index and the Nasdaq Composite turned lower after rising as much as 0.4%, and Treasury yields edged slightly higher following worries that the Federal Reserve may keep higher rates for longer after wholesale inflation accelerated in February. 

Moreover, the recent rise in crude oil prices suggests that overall inflation in March may be hotter than expected, and policymakers may wait longer than June before lowering interest rates. 

 

Weaker U.S. Retail Sales Bounce In February  

Seasonally adjusted retail and food services sales, but not adjusted for prices, increased 0.6% from the previous month and rose 1.5% from a year ago in February. 

Despite elevated inflation and rising interest rates, consumer spending is holding up, but consumers are sticking to basic necessities and avoiding discretionary items. 

Nonstore retail sales increased 6.4%, and food services and drinking place sales advanced 6.3% from a year ago. 

Retail sales in February rose by 0.6% on a monthly basis, and January's monthly sales decline was lowered to 1.1% from the previous estimate of a 0.8% fall. 

Total retail sales over the three-month period to February 2024, which covers the critical holiday period, rose 2.1% from the same period a year ago. 

 

Producer Price Inflation Accelerates In February 

The producer price index for the final demand increased by 0.6% from the previous month in February, the U.S. Bureau of Labor Statistics reported Thursday. 

The annual measure of wholesale inflation accelerated to 1.6% in the month from 0.9% in January after high energy prices drove goods prices to increase at the fastest pace in six months. 

Goods prices increased 1.2%, and the cost of services edged up 0.3%. 

However, the core rate of inflation, which excludes volatile energy and food prices, rose at a slower pace of 0.3% after rising 0.5% in the previous month. 

 

U.S. Indexes and Yields

The S&P 500 index decreased 0.4% to 5,147.67, and the Nasdaq Composite fell 0.2% to 16,142.55. 

The yield on 2-year Treasury notes increased to 4.63%, 10-year Treasury notes inched up to 4.19%, and 30-year Treasury bonds edged down to 4.35%.

WTI crude oil increased $1.07 to $80.81 a barrel, and natural gas prices increased 1 cent to $1.65 a thermal unit.

Gold decreased by $16.64 to $2,157.14 an ounce, and silver fell 17 cents to $24.86. 

The dollar index, which weighs the U.S. dollar against a basket of foreign currencies, edged lower to 103.34.

 

U.S. Stock Movers

Robinhood Markets soared 12.4% to $19.30 after the online brokerage firm reported monthly operating statistics for February 2024 and said assets under custody increased 16% from the previous month. 

SentinelOne dropped 8.4% to $25.39 despite the cybersecurity firm reporting better-than-expected fourth quarter revenue and earnings. 

Dollar General rose 5.7% to $167.21 after the deep discount retailer reported better-than-expected holiday quarter sales and issued an annual earnings outlook ahead of expectations. 

The retailer estimated 2024 earnings per share to fall between $6.80 and $7.55, on the back of sales growth between 6.0% and 6.7%. 

DICK's Sporting Goods rose 4.9% to $197.0 after the athletic goods retailer posted record quarterly sales in the fiscal fourth quarter. 

Net sales in the holiday quarter ending on February 3rd increased 7.85 to $3.9 billion from $3.6 billion, net income advanced 26% to $296 million from $236 million, and diluted earnings per share rose to $3.57 from $2.60 a year ago. 

The company estimated fiscal 2024 earnings per share to range between $12.85 and $13.25 and estimated same-store sales to rise between 1% and 2%. 

 

European Indexes Erase Early Gains After U.S. Inflation Report

European stock market indexes turned lower, crude oil prices jumped, and the euro held steady amid rising tensions in the Middle East. 

Benchmark indexes in Paris and Frankfurt traded at new record intra-day highs but turned lower after wholesale inflation accelerated in February.   

The European Central Bank policymakers are sending signals that an imminent interest rate cut is less likely, but there is a growing possibility of a rate cut later in the year.

"It's perhaps more probable in June, and we are very pragmatic, but that will depend on the data," Bank of France Governor Francois Villeroy de Galhau said on France Info radio.

The ECB's chief economist, Philip Lane, also stressed not to lower rates too soon in an interview with the financial news channel CNBC. 

“We’ve been on hold since last September since a substantial hiking cycle; we do have to take our time to get that right, from holding to dialing back restrictions,” Lane told CNBC’s Steve Sedgwick.

The European Central Bank lifted its key lending rates ten times from near zero to above 4% between July 2022 and September 2023, but inflation is still above the target rate of 2%. 

Consumer inflation in the eurozone has declined to 2.6% in February and has fallen over the last fifteen months after peaking at 10.6% in October 2022, but the decline is largely driven by the sharp fall in energy prices and by the actions of the central bank. 

In other economic news, Spain's statistical agency confirmed the softening of inflation to a six-month low in February, to 2.8% from 3.4% in January. 

The EU harmonized inflation also dropped to a six-month low of 2.9%, as estimated, and was down from 3.5% in January, the National Statistics Institute reported Thursday. 

 

Europe Indexes and Yields

The DAX index decreased by 0.2% to 17,925.26, the CAC-40 index rose by 0.3% to 8,159.68, and the FTSE 100 index inched lower by 0.5% to 7,731.80.

The yield on 10-year German bonds edged up to 2.36%; French bonds inched higher to 2.79%; the UK gilts edged higher to 4.02%; and Italian bonds inched lower to 3.56%.

The euro edged higher to $1.093, the British pound inched higher to $1.281, and the U.S. dollar held steady at 87.95 Swiss cents.

Brent crude increased $1.33 to $85.36 a barrel, and the Dutch TTF natural gas increased by €0.54 to €25.45 per MWh.

 

Europe Stock Movers

K&S AG increased 5.7% to €14.03 after the Germany-based Europe's largest manufacturer of potash and salt miner reported better-than-expected annual results and guidance for the current year. 

Encavis AG soared 25% to €16.94 after the U.S.-based private equity firm KKR launched a 2.8 billion takeover offer for the German independent power generator. 

The renewable power producer operates more than 300 solar parks and wind farms in 12 countries in Europe. 

RWE AG gained 3.5% to €32.71 after the German power generator and trader reiterated its annual outlook. 

Hapag-Lloyd fell 1.1% to €132.80 after the Germany-based container shipping company issued an earnings warning for the current year.

Lanxess AG plunged 8.6% to €23.89 after the specialty chemicals maker based in Germany reported a wider fourth-quarter loss. 

EasyJet declined 2.2% to 525.20 pence after the discount airline completed the sale of a €850 million secured bond maturing in 2031 with an interest coupon of 3.75%. 

The company plans to use part of the proceeds of the offering to repay its existing debt, which will mature in 18 months. 

With the post-pandemic recovery, the company has repaid £1.6 billion and deleveraged its balance sheet. 

EasyJet bonds are expected to be rated Baa2 (with a stable outlook) by Moody's and BBB (with a positive outlook) by Standard & Poor's, with over 200 investors participating in the issue.

 

Japan's Rate Jitters and China's Deflation Worries Dominate Asia Trading

Asian stock markets lacked momentum, and investors stayed cautious in China ahead of the release of earnings announcements from major companies next week. 

Moreover, annual wage negotiations in Japan, known as Shunto, dominated market sentiment after several large corporations agreed to significant wage increases for the second year in a row, raising hopes of rate action by the Bank of Japan. 

 

Spring Wage Negotiations Dominate Market Sentiment in Tokyo 

Market indexes in Tokyo rebounded from morning losses driven by weakness in tech stocks following the decline in New York in overnight trading. 

Stocks struggled to gain traction, and the yen traded around 147 against the U.S. dollar amid widespread speculation that the Bank of Japan is likely to end its negative interest rate policy next week. 

Japan is the only developed country with negative interest rates after keeping rates near zero for more than two decades. 

Investors also keenly awaited the details of annual wage negotiations between the large Japanese companies and unions after Toyota Motor agreed to increase wage demand by more than 5% for the second year in a row. 

The Toyota agreement generally sets the tone for other automakers and leads Japanese companies to finalize their wage agreements. 

Toyota agreed to the largest wage increase since 1999 and accepted the union's demand for a monthly increase between ¥7,940 ($54) and ¥28,440 ($194). 

Nissan Motor also agreed to the monthly wage hike demand of ¥18,000, or $123. 

Nippon Steel, JFE Steel, Kobe Steel, Honda Motor, Mazda, and Japan Airlines are some of the other leading companies meeting or exceeding workers' unions higher wage demands for the second year in a row. 

Real wages in Japan have been stagnant for more than two decades, and companies are willing to provide nominal wage increases of as much as 12% amid labor shortages and rising inflation. 

Toyota Motor closed nearly unchanged at ¥3,444.0, Honda Motor advanced 1.1% to ¥1,751.50, and Nissan Motor advanced 2.2% to ¥563.10. 

The Nikkei 225 Stock Average gained 0.2% to 38,782.48, and the Topix index jumped 0.4% to 2,658.07. 

Diversified conglomerates Marubeni, Itochu, Mitsubishi, and Mitsui & Company gained between 0.7% and 2.2%. 

Semiconductor stocks led decliners, and Tokyo Electron, Advantest, Screen Holdings, and Disco Corp. fell between 1% and 3.5%. 

 

Caution Prevailed In China Trading Ahead of Earnings Releases 

Stocks in Shanghai and Hong Kong were under pressure for the second day in a row ahead of a string of earnings announcements next week and rising tensions between China and the U.S. 

The CSI 300 index decreased 0.06%, and the Hang Seng index declined 0.5% to 16,984.44. 

About 30 companies included in the widely followed Hang Seng index are scheduled to release earnings next week, and investors turned cautious amid economic uncertainties. 

AIA Group decreased 4.4% to HK$62.0 after the insurance company's 2023 earnings met market expectations. 

AIA said 2023 earnings increased 15% to $5.76 billion, or 32.68 cents, in a filing with the Hong Kong Stock Exchange.

AIA, one of the largest travel insurance providers, benefited last year after the Hong Kong government relaxed inbound travel restrictions following three years of border closures during the coronavirus pandemic. 

Tech stocks were among the leading decliners after the U.S. House of Representatives approved a bill that could force China-based ByteDance to divest its stake in the popular short video sharing app TikTok. 

The move follows after Chinese security agencies stepped up arbitrary enforcement of the recently expanded espionage rules on foreign companies operating in China. 

Tencent Holdings, Alibaba.com Group, JD.com, and Baidu Inc. dropped between 0.5% and 1.2%. 

Property companies were in focus in the hopes that China-controlled funds would step up investing in struggling real estate developers. 

Moreover, Hangzhou city loosened its restrictions on the sale of existing homes, and Guangdong province capital Guangzhou approved a second list of 116 properties that are likely to receive financial help and support for the completion and sale of apartments. 

Longfor Group, China Resources Land, and China Vanke jumped between 2% and 4% on the hopes of more financial measures from the government-controlled entities. 

 

India Indexes Struggle Amid Stretched Valuation 

India stocks traded down, and market indexes extended weekly losses amid worries of tighter regulatory scrutiny in small and mid-cap stocks. 

The Sensex and the Nifty indexes declined and extended 2-day losses to more than 1.4%. 

Sebi chairman Madhabi Puri Buch highlighted the need to crack down on market manipulation activities targeting small and mid-cap stocks. 

Puri's comments sent market indexes down by more than 1% in Wednesday's trading. 

Market sentiment was cautious for the second consecutive day amid ongoing global interest rate uncertainties, stretched domestic market valuations, and a lack of additional net flows from foreign investors. 

Moreover, international companies have stepped up selling stakes in their Indian subsidiaries to take advantage of sky-high valuations. 

British American Tobacco was the latest company to announce the sale of a stake in its Indian unit, ITC. 

The Sensex index increased 0.5% to 73,097.28, and the Nifty index closed higher 0.7% to 22,146.65. 

On the Mumbai stock exchange, 74 stocks traded at their 52-week highs and 173 stocks traded at their 52-week lows.

Reliance Industries declined 2.6% to ₹2,873.20, and the company agreed to acquire the remaining 13% stake held by the U.S.-based Paramount Global in Viacom18 Media Pvt Ltd. for ₹4,286 crore, or $517 million. 

Tata Motors decreased 4.3% to ₹973.15, and the company signed a preliminary agreement with the Tamil Nadu government to invest 9,000 crore, or $1.1 billion, in a vehicle manufacturing facility.