Escalating US Inflation Concerns Dampen Market Optimism, VIX Trading Higher

The S&P 500 index experienced a volatile trading session, ultimately losing 0.95% after dipping hard straight out of the gate. The market appeared to find its footing in closing out at the 5,160 level, despite the early headwinds on CPI data.

In what could be seen as turning point in short term sentiment at least, Consumer Price Index data was released, showing an increase of 0.4% month-over-month. At the beginning of the year it was 3.1% and now by the end of March it up to 3.5%.

The fear within markets is that this uptick in inflation could force the Federal Reserve to reconsider its current strategy, which has so far shown a predilection for holding rates steady, and intentions of rate drops. Investors are well aware that higher inflation often spurs the central bank to tighten monetary policy, potentially dampening economic growth and stunting stock market rallies.

The market's “fear gauge,” the VIX index, has been exhibiting signs of this uncertainty. Fluctuating within a tight range and spending most of 2024 so far below 15, the VIX increased 5.47% on the day to end at a mark of 15.8. After gapping up on open at 16.36 the index reflects a market that is undecided, hinting at caution in the face of ambiguous economic signals and taking us back to levels not seen since October last year.

Technology stocks, often seen as bellwethers for market sentiment, have also been trapped in a limbo of sorts. The Nasdaq 100 index continues to tread water above the 18,000 level, extending what has already been a two-month-long consolidation phase. This stagnation suggests that while the tech sector has not given in to bearish pressure, it also lacks the catalyst to push higher.

The release of the minutes from the Federal Reserve's March policy meeting indicate the desire to have more confidence in inflation dropping before cutting rates. With market predictions indicating a nearly 50% probability of another interest rate hold in June, these minutes will continue to be closely scrutinised for any hint of a shift in the Fed's stance on inflation and monetary policy.

It was noted in the minutes that “Some participants noted that the recent increases in inflation had been relatively broad based and therefore should not be discounted as merely statistical aberrations,”.

As the market navigates through these complex currents, it is clear that the prevalent sideways trend may be under threat. Market bulls and bears are set to draw battle lines.