U.S. Indexes were mixed on Tuesday, with the NASDAQ 100 and Russell 2000 underperforming while the S&P 500 closed flat and the Dow closed slightly firmer. Sector performance was also mixed, with Health Care, Consumer Staples and Energy outperforming, while Technology, Consumer Discretionary and Industrials lagged. Tech weighed on the broader market as semiconductor names saw profit taking after recent outperformance, although equities did pare the majority of losses into the close as chip stocks bounced from intraday lows without a clear driver. The geopolitical backdrop remained tense, with markets continuing to focus on the risk of renewed conflict in the Middle East after President Trump described the ceasefire as “very weak”. Tuesday’s developments included reports that Iran had targeted Kuwait, drawing strong condemnation from the UAE, while additional reports suggested Saudi Arabia had struck Iran during the early stages of the conflict. Meanwhile, Iran reiterated it would not return to negotiations unless five conditions are met, including an end to the war, sanctions relief, the release of frozen funds, compensation, and the recognition of Iranian sovereignty over Hormuz. The elevated geopolitical risk premium pushed crude prices higher, weighing on Treasuries and lifting Bond Yields across the curve. Meanwhile, the April CPI report came in hotter than expected, particularly across the core metrics, while services inflation accelerated further. The data saw markets increase Fed tightening expectations, with traders pricing around a 43% probability of a rate hike this year. In FX, the Dollar remained firm amid higher Treasury yields and elevated energy prices. Sterling lagged on continued political pressure surrounding UK PM Starmer, while petro-sensitive currencies like the Canadian Dollar finding some support from the rise in crude prices. Meanwhile, the Australian Dollar was supported by the afternoon equity turnaround. Headline CPI rose 0.6% M/M in April, in line with expectations and easing from the prior 0.9% pace. However, the Y/Y rate accelerated to 3.8% from 3.3%, above the 3.7% forecast. Within the report, the energy index rose 3.8% in April, accounting for more than 40% of the monthly increase in headline CPI. The underlying inflation details were firmer. Core CPI rose 0.4% M/M (0.376% unrounded), above both the 0.3% forecast and the prior 0.2%, while the Y/Y rate accelerated to 2.8% from 2.6%, also topping expectations of 2.7%. Core services inflation picked up to 0.5% M/M and 3.3% Y/Y, while supercore inflation accelerated to 3.4%, reinforcing concerns that underlying price pressures remain sticky beyond the energy shock. The hotter core metrics are likely to concern Fed officials, particularly given the acceleration in services inflation. Officials had previously expected tariff-related inflation effects to gradually roll off over the next two quarters, but persistent services inflation alongside elevated energy prices tied to the ongoing US/Iran conflict could delay any return to Fed easing. Attention now also turns to the expected nomination of Kevin Warsh as Fed Chair on Wednesday, ahead of the June meeting, after he was confirmed by the US Senate to be Federal Reserve Governor on Tuesday. Warsh is widely viewed as more dovish and forward-looking than Powell, although his recent Senate testimony pushed back against perceptions he would support politically driven rate cuts, stressing he would not pre-commit to policy decisions. Fed Member Goolsbee said the CPI report showed “not much that’s good”. He added that the April CPI report was worse than expected, and the worst part is the services inflation. This is not the first time the Chicago Fed President has shown concern over services inflation, reiterating that inflation is going the wrong way, not just in oil-related and tariff-related things. Goolsbee, however, remains optimistic that rates can come down a fair amount, but need progress on inflation. He noted that the labour market is stable, but not good. Separately, he said the interconnection of private credit with conventional institutions is not as big as the connections in the 2007-2009 financial crisis. Elsewhere, Oil surged a further 4% while Gold ended Tuesday’s volatile trading session with a 1% gain.
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