Russell 2000 Crushed as March Inflation Comes in Hotter

Also 10-year T-note, gold, crude oil and Australian dollar futures

1. Russell 2000 E-mini futures (/RTY): -3.04% 

2. 10-year T-Note futures (/ZN): -1.01% 

3. Gold futures (/GC): -0.90% 

4. Natural gas futures (/NG): +1.98% 

5. Australian dollar futures (/6A): -1.21% 

Dismay is the mood on Wall Street this morning in the wake of the March U.S. inflation report. The consumer price index came in hotter than expected, up by 0.4% month over month (m/m) and 3.5% year over year (y/y) on the headline, and 0.4% m/m and 3.8% y/y on the core; both the headline and core readings were a bit stronger than forecasted (+0.3% m/m and +3.4% y/y expected for the headline; and +0.3% m/m and +3.7% y/y on the core). 

The reasons for the inflation beat were the usual suspects in recent months: shelter (owner’s equivalent rent, or OER) and transportation (specifically, auto insurance). Nevertheless, the historical statistics aren’t pretty: core CPI is up by 4.6% annualized over the past three months, which would be the fastest three-month rate of any three-month period in the 20 years preceding the pandemic. 

The initial reaction pummeled stock futures and bond yields spiked. For equities, markets have fallen back to the lows seen last week. For bonds, are back to their yearly lows, which are the lowest levels since November. Precious metals are (finally) backing down as the U.S. dollar jumped back to its yearly high. The question for traders now is whether or not a 0.1% miss is a material miss; prior 0.1% misses on CPI (both m/m and y/y) have been faded within 24-hours. Is this time different? 

Is this morning’s inflation report the straw that broke the camel’s back? S&P 500 futures (/ESM4) traded below its monthly range of 5,200 and is trading near March lows as equity traders price in the latest data. The leader to the downside was the Russell 2000 (/RTYM4) with nearly double the loss of that seen in /ESM4. The repricing in the bond market is certainly going to be a headwind for equity traders over the next few weeks. We will see earnings start up later this week with the big banks and then technology next week, but that may not be enough to save stocks, even if companies post better-than-expected earnings.  

Bond markets are rapidly repricing for a longer-for-higher rate environment after this morning’s CPI report. The 10-year T-note futures (/ZNM4) fell 0.93% ahead of the Wall Street open, pushing its underlying yield up by 13 basis points to trade at 4.499%— the highest level since November 2023. The Treasury will auction 10-year notes today. The higher yield might bring in some demand to that auction, but if markets believe rates will keep rising in the coming weeks, demand may be weak.  

A stronger dollar and higher Treasury yields held back gold prices (/GCM4) this morning, dropping 0.55% ahead of the New York open. The report provides an opportunity for bulls to take profit after a multi-week runup that drove bullion prices to record highs. With the major event risk out of the way for interest rate cut odds, the post-CPI move may persist for a couple of days or more, which puts a bearish tilt on the outlook for precious metals, at least until we get some data that changes the narrative.  

Crude oil prices (/CLK4) rebounded today, rising about 0.76%, despite yesterday’s report from the American Petroleum Institute (API) that showed a bigger-than-expected build in U.S. crude oil inventories. A potential deal between Israel and Hamas fell apart after Hamas said yesterday the Israeli proposal did not meet its demands, according to Reuters. The U.S. government also raised its price target for Brent crude in 2024 from $87 per barrel to $88.55. Today the Energy Information Administration (EIA) will report stockpiles. 

The risk-sensitive Australian dollar was crushed after the U.S. inflation report charged the dollar and U.S. yields, with prices (/6AM4) down 1.21%. That move erased the past two days of gains and then some, although the currency remains higher on the month. There isn’t much in the way of high-impact economic data for Australia besides for consumer inflation expectations due out tonight. Most of the strength in the currency is coming from China, where economic indicators show that the Asian-Pacific growth engine may be reaccelerating. 

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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