S&P 500 pulls back into mid-4,200s as Russia/Ukraine talks disappoint, US CPI rises to multi-decade highs

US equity indices have broadly reversed lower on Thursday in tandem with their global peers, as Wednesday’s optimism fades following less than hoped for progress at the latest high-level Russia/Ukraine meeting. The S&P 500 is down more than 1.0% on the day and trading back below 4,250 after posting its best one-day percentage gain since June 2020 on Wednesday, when it bounced from the mid-4,100s although failed to close above 4,300. At the time of writing on Wednesday, some market commentators/investors had been warning that the rebound in sentiment was premature given the lack of progress towards de-escalation in the Ukraine conflict and given still very elevated commodity prices.

Those labeling Wednesday’s move as a “dead cat bounce” appear to have been proven right by Thursday’s more cautious price action. Indeed, in the absence of concrete signs that Russia and Ukraine are moving towards agreeing the terms of a ceasefire and as Western nations continue to jawbone about tougher sanctions on Russia, the stage is not set for a lasting equity market rebound just yet. Indeed, stagflation fears, which seem particularly acute in Europe, look set to remain a major macro theme in the months ahead. The latest US Consumer Price Inflation report for February released earlier on Thursday emphasised the scale of the challenge.

Headline CPI rose to 7.9% YoY in February from 7.5% in January to hit fresh multi-decade highs, driven by a 0.8% MoM rise in prices, both in line with economist forecasts and, according to analysts, solidifying expectations for a 25 bps rate hike from the Fed next week. Amid recent price action in the global commodity space, inflation is only surging higher from here and markets remain undecided regarding the degree to which the Fed will respond. Six 25 bps hikes are expected this year, according to US money markets, but longer-term bond yields continue to suggest that the Fed is not seen lifting rates above the “neutral” level (2.0-2.5%), i.e. to levels that would actually act as a drag on economic growth.

Depending on how bad the US inflation picture gets in the coming months, the possibility that markets do start to buy into the idea that the Fed might take rates into the contractionary territory to tackle inflation is a big potential downside risk to the equity space. Looking at the performance of the other major US indices on the day, the Nasdaq 100 index is down 1.4% and is underperforming amid a continued push higher in US bond yields, while the Dow dropped a more modest 0.5%. The CBOE S&P 500 Volatility Index or VIX was flat in the 32.00s area.