Friday April 17: Stocks Fall After CPI Data

Stocks fall after higher inflation and worries over the future of Greece. The S&P falls 1.13% to 2,081 while the Dow falls 1.54% to 17,826. The biggest headline of the day was the consumer price index, which showed core prices reflecting an annualized 1.8% inflation rate. This improvement to the inflation outlook raises the chances of the Fed raising rates sooner and equities fall as a result. The contradiction between inflationary data and employment data leads to uncertainty in financial markets over the future of monetary policy. The increasing inflation numbers contrast with the more negative employment data that has been seen recently. In spite of the increased outlook for higher interest rates, the dollar stays flat. The yield curve flattens with the two year yield rising to 0.51% and the ten year yield falls 2 basis points to 1.86%. The flattening of the yield curve contrasts with the higher inflation numbers, and this trend may possibly reverse if the inflationary trend continues. The bund yield hits a record low of 0.049% as a result of Greek uncertainty and quantitative easing, and finishes lower at 0.078%.

Core consumer prices, which exclude price effects due to volatile factors such as food and energy, rise 1.8% on an annualized basis. Among other inputs, the core CPI includes rent, medical care, clothing, and vehicles. The overall inflation rate increased 0.2% from the previous month, which was in line with expectations. This number comes in spite of energy price effects, which have fallen 18.3% over the last year. Yesterday, Dennis Lockhart said he was not concerned about the outlook for core inflation becoming worse unless there was a further appreciation in the dollar. In addition, stronger wage growth in certain parts of the country. Higher wages will result in higher prices over time. Despite the higher inflation data and its potential effects on the Fed’s interest rate decision, the dollar finishes flat. This is partly due to recent strength in currencies from oil exporting countries, which have been appreciating due to the recent rally in oil prices.

Mario Draghi says that European countries are collectively better prepared for an economic collapse in Greece, however there would undoubtedly be unforseen negative repercussions. As a result, the head of the ECB urges Greece and its creditors to compromise and come to a resolution. Draghi says that the ECB has the necessary tools to support certain markets in the event of a collapse, such as monetary transactions (which have never been used before), and additional quantitative easing measures. He uses the term “unchartered waters” to describe what the future may have in store for the eurozone in the event of a Grexit. As a result of this uncertainty, Jack Lew of the U.S. Treasury says that a Greek default would result in negative sentiment towards the eurozone, and that both parties should find a solution. The situation is getting more serious each day, as Greece will run out of cash in May or June without securing €7.2B. In order to secure these funds, Greece must reach an agreement with its creditors.

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Friday April 17: Stocks Fall After CPI Data

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