Financial markets were rattled on Tuesday after the Bureau of Labor Statistics reported that the Consumer Price Index rose 3.4% year-on-year in February, exceeding analyst expectations of 3.1% and dealing a significant blow to hopes of an imminent rate cut from the Federal Reserve. The reaction was swift and decisive: the yield on the 10-year Treasury note climbed 14 basis points to 4.62%, while the S&P 500 fell 1.8% in its worst single-day performance since October.
The so-called "supercore" measure of inflation — which strips out food, energy, and shelter costs to capture underlying services price pressures — rose 0.5% on the month, the highest reading since May 2023. This figure carries particular weight for Federal Reserve policymakers, who have repeatedly pointed to services inflation as the most stubborn component of the price stability challenge they have been wrestling with since 2021.
Speaking to reporters after a conference in Washington, Federal Reserve Governor Christopher Waller acknowledged that the data "gives us pause" about the pace of any potential policy easing. "We need to see sustained progress toward our 2% target before adjusting the policy rate," he said, in language that markets interpreted as effectively closing the door on a June cut — previously the baseline expectation among futures traders.
The recalibration is being felt most acutely in rate-sensitive corners of the market. Real estate investment trusts, which had rallied strongly in anticipation of lower financing costs, fell an average of 3.1% on the day. Technology stocks, whose valuations are particularly sensitive to discount rate assumptions, also came under pressure, with the Nasdaq Composite declining 2.3%.
European markets were not immune. The euro-area economy, while grappling with its own distinct set of challenges including sluggish growth in Germany and political uncertainty in France, saw its sovereign bond markets reprice in sympathy with the US move. The yield on the German 10-year Bund — the eurozone's risk-free benchmark — rose 8 basis points to 2.71%, its highest level since January.
Currency markets reflected the reassessment of interest rate differentials. The dollar index strengthened 0.7% against a basket of major currencies, with the yen falling to its weakest level against the greenback since November. The Bank of Japan, which only last year finally exited its negative interest rate policy, faces renewed pressure to intervene in currency markets should the yen's weakness accelerate further.