NEW YORK — On Friday, U.S. stock markets experienced a downturn following a troubling report indicating that consumers are anticipating significantly higher inflation rates, in conjunction with a mixed assessment of the job market in the country.
As of 11:30 a.m. Eastern time, the S&P 500 index dropped by 0.6%, nearly erasing what had previously been a modest weekly gain. The Dow Jones Industrial Average also saw a decline, falling by 260 points, equating to a 0.6% drop. The Nasdaq composite, further affected by a notable plunge in Amazon’s stock after its latest earnings report, led the losses with a 1% decrease.
In the bond market, Treasury yields rose following the morning report which indicated a shift in consumer sentiment. According to preliminary findings from the University of Michigan, consumers expect inflation rates to reach 4.3% over the next year, marking the highest forecast since 2023. This expected rate is a full percentage point higher than what consumers anticipated a month prior, signaling a second consecutive month of an unexpected rise. Economists have pointed to possible U.S. tariffs on a variety of imported goods, proposed by former President Trump, which could contribute to increased costs for consumers.
The unsatisfactory consumer sentiment data coincided with a mixed job market report showing that hiring in the previous month was less than half the rate of December. However, the report also presented some positive aspects, revealing a decrease in the unemployment rate and an increase in average wages that exceeded economists’ expectations.
These collective data points could lead the Federal Reserve to reconsider its stance on interest rates. The Fed had begun reducing its main interest rate in September to alleviate pressure on the economy and labor market, but it hinted at the end of the year that it might implement fewer cuts than previously expected due to concerns over persistently high inflation levels.
Interest rates hold significant importance on Wall Street, impacting investor behavior. While lower rates can motivate investors to buy stocks and other assets, they can also exacerbate inflation. For Scott Wren, the senior global market strategist at Wells Fargo Investment Institute, the recent job data did not alter his prediction that the Fed would only make one federal funds rate cut in 2025, a view that is slightly more cautious than the general sentiment on Wall Street. Traders are currently estimating nearly a 49% likelihood of at least two cuts, although some are speculating on no rate reductions at all.
Wren noted that financial markets might remain volatile in the near future due to uncertainties surrounding interest rates, Trump’s tariffs, and other unpredictable global factors. After causing significant fluctuations in financial markets earlier in the week, concerns about a possible global trade conflict have somewhat subsided following Trump’s decision to grant a 30-day delay on tariffs set for Mexico and Canada. However, economists from Bank of America have warned that uncertainty could continue to impact global investment, even if the final outcomes are favorable.
Meanwhile, stocks of major U.S. corporations continue to show fluctuations as they disclose their profits from the final quarter of 2024. Although Amazon exceeded analysts’ profit forecasts, its stock still fell by 4% due to disappointing revenue projections.
Homebuilder stocks also faced substantial declines, as fewer anticipated interest rate reductions could keep mortgage rates elevated. D.R. Horton dropped by 4.5%, while Lennar fell by 3.9%. In contrast, the Expedia Group saw its shares rise by 18.4% after surpassing profit expectations for the last quarter of 2024. The company’s CEO, Ariane Gorin, stated that travel demand during the previous quarter was stronger than predicted, and the company is reinstating dividends for its investors after suspending them in 2020 due to the pandemic’s adverse effects on the travel industry.
Additionally, Take-Two Interactive Software’s stock soared by 14.4%, as it also exceeded profit expectations for the recent quarter, with CEO Strauss Zelnick crediting the success of its NBA 2K game. The company reassured stakeholders of its latest Grand Theft Auto game’s anticipated release in the fall, alleviating concerns about potential delays.
In bond market activity, the yield on 10-year Treasuries rose to 4.48% from 4.44% on Thursday, while the two-year Treasury yield, which is more closely linked to expectations for the Fed’s actions, increased to 4.27% from 4.22%.
Economists are wary that high inflation expectations among U.S. households may lead them to purchase items preemptively, creating a self-fulfilling cycle that exacerbates inflation.
Internationally, stock indices experienced modest declines across Europe, following a mixed performance in Asian markets.
