Dow drops over 500 points as hot inflation data dents rate-cut hopes

• Hotter-than-anticipated inflation has dampened hopes for a quick Fed policy pivot.
• The Dow Jones lost well over 700 points at one point, while the S&P 500 fell below the 5,000 threshold.

US stocks sank from all-time highs as January's inflation data came in hotter than anticipated, disappointing hopes for a pivot in monetary policy.

The latest consumer price index climbed 0.3% month-over-month and 3.1% from a year prior, ahead of expectations for a 0.2% and 2.9% increase, respectively.

Core CPI saw its largest jump in eight months, gaining 0.4% for the month and 3.9% on an annual basis. The measure excludes food and energy components, and was expected to rise 0.3% month-over-month and 3.7% year-over-year.

The gauge is preferred by Federal Reserve officials, who previously cautioned markets that more evidence of falling inflation is needed before interest rates are cut. Instead, the CPI provided investors with a wake-up call to the possibility of higher-for-longer monetary policy.

"A market that forcefully expected earlier easing — fortified by a series of rate cuts throughout the year — has had to digest not just a barrage of consistent Fedspeak, but the stark reality that the Fed can still not declare victory on its long campaign to quell inflation," LPL Financial chief global strategist Quincy Krosby said. "Even though rate cuts will probably begin in 2024, it's not if but when, the last mile is getting longer."

No US index was spared, with the Dow Jones hemorrhaging over 700 points at one point on Tuesday, its biggest drop in nearly a year. The S&P 500 fell back below the 5,000 threshold.

Odds of a rate cut in May declined to 35%, with investors indicating a 64% chance before the inflation report.

The inflation data sent Treasury yields up, with the 10-year rate spiking over 14 basis points to 4.316%. The rate of the policy-sensitive two-year bond hit its highest level since before December.

"The CPI data has disrupted the string of Goldilocks growth and inflation data that had helped to lift the S&P 500 over 5,000," Brian Rose, senior US economist at UBS Global Wealth Management, said. But it doesn't change our positive fundamental outlook for 2024 of solid growth, further disinflation, and the start of Fed rate cuts in Q2 that is supportive of risk assets."

Here's where US indexes stood at the 4:00 p.m. closing bell on Tuesday:

• S&P 500: 4,953.18, down 1.37%
• Dow Jones Industrial Average: 38,272.39, down 1.35% (-524.99 points)
• Nasdaq Composite: 15,655.60, down 1.80%

Here's what else happened today:

• Markets could be overreacting to the hot inflation report, analysts suggest.
• Nvidia has grown to the fourth largest US company, eclipsing Amazon.
• Investors are the most bullish in 2 years on tech rally, Bank of America says.
• Peak oil demand is far out, as India and China continue buying, OPEC chief says.
• Half of tankers sanctioned for Russian crude cargo are now idle.
• The S&P 500 has 30% more upside through the end of 2025, Capital Economics says.

In commodities, bonds, and crypto:

• West Texas Intermediate crude oil climbed 1.05% to $77.74 a barrel. Brent crude, the international benchmark, increased 0.73% to $82.60 a barrel.
• Gold dropped 1.33% to $2,006.00 per ounce.
• The 10-year Treasury yield rose 14 basis points to 4.316%.
• Bitcoin fell 1.29% to $49,420.33.