Markets Decline After Stronger-Than-Expected CPI Data; June Fed Rate-Cut Odds Rise

U.S. stock indices closed lower Friday amid a surge in inflation concerns, with the S&P 500 shedding 1.2% and the Nasdaq Composite dropping 1.8%, while the Dow Jones Industrial Average lost 0.9%. The selloff followed the release of January's CPI report, which showed a 3.4% year-over-year increase in consumer prices—above the 3.1% expected by economists and the 3.2% seen in December. Core CPI, excluding food and energy, rose 3.6% annually, also surpassing the 3.4% forecast. The inflation data underscored persistent price pressures, dampening hopes for an early rate cut. As a result, financial markets sharply adjusted expectations: the CME Group's FedWatch Tool now indicates a 72% probability that the Federal Reserve will reduce the benchmark federal funds rate by June 2026. This marks a significant increase from the 58% probability assessed prior to the CPI release. Traders continue to anticipate a full 50 basis points of easing by year-end, though the pace remains uncertain. Bond markets reacted swiftly, with the yield on the 10-year U.S. Treasury note rising to 4.82%, its highest level since mid-2023, reflecting reduced demand for fixed-income securities amid higher inflation expectations. Meanwhile, the dollar strengthened, with the DXY index climbing 0.6% to 104.42, as traders reassessed the Fed's timeline for monetary easing. Investors across sectors were affected, with technology and growth stocks suffering the steepest declines. The Nasdaq-100 fell 2.1%, dragging down major tech firms including Apple (AAPL), Microsoft (MSFT), and Nvidia (NVDA), which saw losses of 2.3%, 1.9%, and 3.1%, respectively. Conversely, financials edged higher, as higher inflation and interest rates could benefit bank net interest margins.