Trading Day: Hello inflation, goodbye 2026 Fed cut

By Jamie McGeever

ORLANDO, Florida, March 18 (Reuters) - Wall Street sank and Treasury yields leaped on Wednesday as traders interpreted a spike in oil, hot U.S. producer prices, and underlying signals from the Federal Reserve - even as the central bank stood pat on policy - as signs that interest rates will not be cut again this year.

In my column today I look at how investors, having just had a sudden oil shock thrust upon them, now face the prospect of a much stronger dollar than they had bargained for at the start of the year. They may have to reassess their 2026 outlooks.

If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today. 1. Fed leaves rates unchanged, sticks with single cut in2026 despite higher inflation 2. Iran’s huge Gulf gas field is struck in major escalation 3. ’Not our war’: Europe says no to Trump 4. U.S. producer inflation heats up even before Middle Eastconflict 5. Inflation expectations flash a warning - but not along-lasting one: Mike Dolan

Today’s Key Market Moves * STOCKS: Solid start in Asia - Japan up nearly 3%, SouthKorea almost 6% - turns sour as Europe slides and main U.S.indices fall around 1.5%. S&P 500, Dow have lowest closes sinceNovember. * SECTORS/SHARES: All 11 sectors in the S&P 500 fall.Consumer discretionaries, staples and healthcare down 2% ormore. McDonald’s, Procter & Gamble, Home Depot, Visa all down 3%or more. * FX: Dollar up broadly. Several emerging FX -1% or more -KRW, THB, HUF, ZAR, PLN, CLP. Biggest G10 decliners are CHF,SEK, AUD, all -1%. * BONDS: Yields spike, curves flatten. U.S. 2y yield up 10bps, curve flattest this year. December SOFR contract now showsless than 50% chance of a cut. 2-year UK and German yields +8bps. * COMMODITIES/METALS: Oil jumps, Brent +5% to $110/bbl,WTI +3% to $100. Gold slumps 4% to one-month low below $5,000.

Today’s Talking Points

* Hawkish wind blows

The Fed left rates on hold as expected, and also maintained its policy rate and unemployment projections. It sees growth picking up a bit and an inflation spike this year. The most notable median projection shift was the long-run fed funds rate, up to 3.1% from 3.0%.

All in all, no major fireworks. But under the hood, the new "dot plot" shows a notable shift toward fewer projected rate cuts, and one policymaker nodding to a rate hike next year, while Governor Christopher Waller withdrew his dissent for a cut this time around. A hawkish wind is blowing.

* Escalation and underestimation

There’s been a tendency, especially in U.S. trading hours, for investors to "buy the dip" in the expectation that war in the Middle East decelerates, oil supplies re-accelerate, and a sense of normality returns to the global economy and markets. That’s looking increasingly optimistic.

There is little evidence that hostilities are cooling, and investors may be underestimating the impact of the energy supply disruption and $100 oil - inflation, consumer spending, wealth effects, financial conditions are all liable to change. Potentially significantly, and not for the better.

* PPIpeline pressures

U.S. producer price inflation figures for February, released on Wednesday, were pretty extraordinary. The annual core rate jumped to 3.9%, the highest in over a year, and the monthly headline rate accelerated for the fourth month in a row.

Morgan Stanley economists say this raises 3-month annualized core PCE inflation - the Fed’s preferred measure - to 4.56%. That’s almost a full percentage point higher than the comparable rate in January, and more than double the Fed’s 2% target. And remember, all this is pre-oil shock.

What could move markets tomorrow? * Developments in the Middle East * Energy market moves * New Zealand GDP (Q4) * Australia unemployment (February) * Japan machinery orders (January) * European Central Bank interest rate decision * Bank of England interest rate decision * UK unemployment (January) * Sweden interest rate decision * Switzerland interest rate decision * Bank of Japan interest rate decision * U.S. weekly jobless claims * U.S. Philly Fed business index (March) * U.S. Treasury sells $19 billion of 10-year TIPS at auction * U.S. President Donald Trump meets Japanese Prime MinisterSanae Takaichi in Washington

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