U.S. stocks limped into the final minutes of the afternoon session after jumping at the open on data that showed inflation moderated, but was likely not enough to forestall the Federal Reserve from raising interest rates one more time this year.

The S&P 500 ended the day down 0.4 per cent as the Nasdaq 100 tumbled 0.9 per cent. The tech-heavy gauge fell in six of the last seven sessions. Policy-sensitive two-year Treasury yields tumbled as much as 15 basis points before paring the drop to trade at 3.97 per cent. Swaps markets showed the odds are still in favor for a Fed rate hike in May while traders amped up bets the central bank will cut rates later this year.

Markets rallied early in the day after data showed U.S. consumer prices rose 0.1 per cent in March, just below economists’ forecast of 0.2 per cent. The closely watched core CPI number — which excludes food and energy — increased 0.4 per cent, meeting the median estimate and coming on the heels of the prior month’s 0.5 per cent gain. 

While stocks have been stuck in a tight range, data hinting at a slowdown in economic growth could catalyze equities to move lower, according to Eric Johnston, head of equity derivatives and cross assets at Cantor Fitzgerald. Already, he says the economy is slowing, and “equities will begin to price that in very shortly.” 

“Stocks have been helped the past month by CTA buying of U.S. equities and due to global liquidity flows, and we think both are about to stop or reverse,” he said referring to the commodity trading advisers that make rules-based bets in futures markets. Investors will be dissecting Thursday’s producer prices report next.

Meanwhile, Fed policymakers scaled back expectations for peak rates as they sought to balance reining in inflation and steadying the banking sector, according to minutes of the March Federal Open Market Committee released Wednesday. Fed staff are now predicting a “mild recession” later this year. Officials have been sending mixed messages on the battle to tamp down rising prices. Earlier, San Francisco Fed President Mary Daly said more rate hikes may not be needed while Richmond Fed’s Thomas Barkin said “we still have a ways to go.”

Some of the biggest banks in the U.S. are expected to report earnings on Friday.

Liz Young, head of investment strategy at SoFi, expected markets would swing today, CPI data was not “below expectations in a meaningful way.” She expects the producer price report to provide added clarity.

“What closes the loop on this inflation data is actually the PPI data,” Young said. “Although CPI has been moderating, which is definitely good news, if PPI remains sticky or slightly higher than expectations, that’s where you see the knock-on effect on corporate margins.”

Elsewhere, the dollar fell against a basket of all its G-10 peers while Bitcoin slumped, dipping back below US$30,000 after hitting its highest since June on Tuesday. Oil climbed to the highest level this year as crude futures topped US$83 a barrel and gold resumed its advance.

Here’s what else Wall Street had to say about CPI data:

• Lauren Goodwin, portfolio strategist at New York Life Investments
  • “The March inflation data confirms that the disinflationary process is intact, but moving very slowly. Core CPI is still running far above target.”
  •  “The Fed would have to see a slowdown in core CPI to accept that monetary policy has been tightened far enough. Absent that evidence today, we expect to see another 25 basis point hike in May before the Fed pauses.”
• Alexandra Wilson-Elizondo, co-head of portfolio management for multi asset solutions at Goldman Sachs Asset Management
  • “Today’s data release will most likely be perceived as welcome news because headline was marginally light of expectations and core was in-line.”
  • “The continued strength in the core figure is not consistent with the Federal Reserve’s 2 per cent long-term target and will keep a 25-bps hike on the table for the May meeting. However, the data release does not yet reflect post-banking stress information and the subsequent tightening of credit conditions.”
• Jake Jolly, head of investment analysis at BNY Mellon Investment Management
  • “Ultimately you can really only justify these strong moves in the equity market if you believe that the soft landing probability is increasing materially.”
  • “It’s a good thing when inflation prints are in line with expectations, it’s much better than an upside surprise. But to me, this is still a very, very strong, inflationary pressures report, so it certainly doesn’t signal the all clear.”
• Marija Veitmane, a senior multi-asset strategist at State Street Global Markets
  • “Last year saw a substantial equity selloff as higher interest rates pushed investors out of expensive stocks. Now we are nearing the end of the hiking cycle (though not there yet) and the market is getting excited about stocks again. We think this is wrong.”
  • “The hiking cycle will only end when the economy slows substantially – we see no other way for inflation to disappear. And this is not going to be good news for equity investors as a decline in earnings would hurt more than an offsetting rate cut.”
• John Leiper, chief investment officer at Titan Asset Management 
  • “Core inflation remains stubbornly high and an increasingly bullish outlook for energy prices will continue to justify higher for longer. Equities remain expensive and we retain our defensive positioning.”
  • “You can’t go from a decade of ultra-low interest rates to the fastest rate hike cycle in over 40 years without systemic repercussions, not just to the banking sector but the economy as a whole. We are heading into recession and whether we get an additional rate hike or not, inflation remains an issue, despite today’s number. The writing is already on the wall.”
• Guillermo Hernández Sampere, head of trading at MPPM GmbH
  • “The key core rate has risen slightly, so the inflationary pressure remains high, the Fed will probably continue to raise interest rates but less aggressively because of the incidents in the banking sector. The market sees the peak within reach.”
• Joachim Klement, head of strategy, accounting and sustainability at Liberum Capital 
  • “CPI is good news all round. Not only did energy inflation become materially negative as expected, food inflation stalled and shelter inflation is cooling off. All that indicates that the Fed remains on the right track in bringing inflation down. While core inflation keeps on rising, the main drivers of core inflation in recent months are mostly cooling off, indicating that the Fed may be able to stop hiking rates after the next meeting.”

Key events this week:

China trade, Thursday
U.S. PPI, initial jobless claim, Thursday
U.S. retail sales, business inventories, industrial production, University of Michigan consumer sentiment, Friday
Major U.S. banks JPMorgan Chase, Wells Fargo and Citigroup report earnings, Friday

Some of the main moves in markets:

Stocks

The S&P 500 fell 0.4 per cent as of 4 p.m. New York time
The Nasdaq 100 fell 0.9 per cent
The Dow Jones Industrial Average fell 0.1 per cent
The MSCI World index was little changed

Currencies

The Bloomberg Dollar Spot Index fell 0.5 per cent
The euro rose 0.7 per cent to US$1.0989
The British pound rose 0.5 per cent to US$1.2484
The Japanese yen rose 0.4 per cent to 133.19 per dollar

Cryptocurrencies

Bitcoin fell 1.2 per cent to US$29,817.5
Ether rose 0.4 per cent to US$1,902.82

Bonds

The yield on 10-year Treasuries declined two basis points to 3.40 per cent
Germany’s 10-year yield advanced six basis points to 2.37 per cent
Britain’s 10-year yield advanced three basis points to 3.57 per cent

Commodities

West Texas Intermediate crude rose 2.1 per cent to US$83.24 a barrel
Gold futures rose 0.5 per cent to US$2,029 an ounce