Global Markets React as U.S. Inflation Data Sparks Stock Declines and Dollar Surge

European stocks and S&P 500 futures declined on Tuesday as investors reacted to data revealing that U.S. inflation slowed less than anticipated in January. The dollar and U.S. Treasury yields surged in response, prompting a reevaluation of expectations for Federal Reserve interest rate cuts this year.

Futures for the U.S. S&P 500 dropped by 1.12%, extending a previous decline of 0.35% prior to the release of the data. Meanwhile, Nasdaq futures experienced a 1.64% decrease.

U.S. stock markets, which had been reaching record highs, faced pressure from the news, particularly impacting tech companies, and shifting perceptions about the Fed's monetary policy.

The Europe-wide Stoxx 600 index fell by 0.92%, compared to a 0.47% decrease before the data's publication. Germany's Dax and Britain's FTSE 100 also experienced declines of 0.91% and 0.44%, respectively.

According to data from the consumer price index (CPI), U.S. inflation declined to 3.1% year-on-year in January, slightly above economists' expectations of 2.9%. The Fed had previously signaled a pivot towards interest rate cuts following a peak inflation rate of 9.1% in June 2022.

Following the release of the data, the yield on 10-year Treasury notes surged by 12 basis points to reach 4.291%. The dollar index, which measures the dollar against six other major currencies, rose by 0.41% to 104.57, while the euro declined by 0.39% to $1.073.

Investors adjusted their expectations for Fed rate cuts, with approximately 94 basis points of cuts anticipated by the end of the year, down from 112 before the data's release. The likelihood of the first rate cut occurring by May decreased from 71% to 40%, according to money market pricing, reflecting a revision in market sentiment following strong economic data in recent weeks.

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