Nasdaq 100 and Russell 2000 Drop as Inflation Surge Changes Fed Cut Odds

Also, 10-year T-note, silver, crude oil and Japanese yen futures

1. Russell 2000 E-mini futures (/RTY): -1.48% 
2. 10-year T-note futures (/ZN): -0.65% 
3. Silver futures (/SI): +0.57% 
4. Crude oil futures (/CL): -1.46% 
5. Japanese yen futures (/6J): -1.12% 

The January U.S. inflation report came in much hotter than anticipated, throwing into question whether the Federal Reserve will be able to cut rates again this year. Headline inflation was 0.5% month over month (m/m) and 3% year over year (y/y), well above forecasts of 0.3% m/m and 2.9% y/y. The core reading wasn’t any better: 0.4% m/m vs. 0.3% m/m expected; and 3.3% y/y vs. 3.1% y/y expected. This is the seventh consecutive month of the m/m rate increasing. 

Traders have immediately adjusted their rate cut odds, with the timing of the Fed’s next 25 basis point (bps) rate drop now expected in December. A week ago, the next policy adjustment was expected in June. In turn, Treasury yields have jumped across the curve, with the two-year yield rising 8bps after the data release. Rate-sensitive equities are being hit the hardest, with small caps suffering more than their peers. 

Equity traders didn’t like this morning’s inflation data. A jump in yields immediately following this morning’s consumer price index (CPI) release forced traders to sell risk assets. Contracts for the Russell 2000 (/RTYH5) fell 1.5% as we moved into the cash session. The pushback in Fed rate cut bets will recalibrate risk sentiment in the market as corporate earnings continue to cross the wires. CVS Health (CVS) rose over 12% in early trading after providing full-year guidance that matched estimates. Super Micro Computer (SMCI) rose 5%, even after the company trimmed its full-year revenue target. Traders have their eyes on Reddit (RDDT), with the social media company scheduled to report earnings after the bell today.  

The bond sell-off from yesterday that came after Fed Chair Jerome Powell expressed a patient outlook on rate cutting continued this morning following the inflation report. Rate traders pushed back their bets on when the Fed will cut next, which sent yields surging higher. Those yields are putting pressure on risk assets across the market as U.S. trading gets underway. The Treasury will auction off 10-year notes today.  

Silver prices (/SIH5) appear to be the favored precious metal to move away from market volatility this morning, with prices up about 0.6% in early trading. The metal is outperforming gold, which has seen more upside recently. Silver meanwhile remains well off its all-time highs from 2011. Traders aggressively defended silver at the 32 handle yesterday following several other attempts to breach below the technical barrier over the last week. The swing high from January now appears to be a firm level of support where buyers show up. However, traders should be cautious if yields continue to rise.  

Crude oil futures (/ClH5) fell nearly 2% this morning, with higher yields and a risk-off tone across markets impacting the commodity. U.S. stockpiles are expected to rise over the next few months following the American Petroleum Institute’s weekly report released yesterday showing a 9 million barrel increase. The Energy Information Administration (EIA) is set to release its own figures later today. Meanwhile, the prompt spread in crude—the difference between the current and next month’s contract—is on track to lose its backwardated status—signaling a weak physical market.  

The rise in Treasury yields was bad news for the Japanese yen, with futures contracts (/6JH5) dropping over 1% following the CPI report. The increase in U.S. yields leaves the premium in place vs. Japanese yields, which is bad news for the currency, which put in an impressive rally just last week leading traders to believe that the yen’s woes could be over after a terrible performance in 2024. Still, a trendline carved out by rising lows from the January swing low remains intact, but the currency will have trouble holding that support level should U.S. yields continue to rise.  

Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx

Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. #@fxwestwater
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