US stocks drop and Treasury yields jump as inflation data shakes rate bets

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US stocks dropped and Treasury yields jumped on data that showed US inflation easing less than expected, as investors scaled back bets that the Federal Reserve will begin cutting interest rates as soon as May.

The S&P 500 index of blue-chip US stocks closed down 1.4 per cent on Tuesday. The tech-heavy Nasdaq Composite dropped by 1.8 per cent.

The market moves came after new government figures showed US inflation cooled less than expected in January, to 3.1 per cent year on year.

Following Tuesday’s release, the likelihood of a rate cut in May implied by futures markets fell from 50 per cent to 30 per cent, while the chances of a cut in March were almost fully eliminated.

The two-year Treasury yield, which moves with interest rate expectations, rose 0.18 percentage points to 4.65 per cent, its biggest one-day move since last March. The benchmark 10-year yield increased 0.14 percentage points to 4.31 per cent. Yields rise as prices fall.

The figures come as the Fed considers when to start trimming interest rates from their current level of 5.25 per cent to 5.5 per cent after a lengthy campaign to tame persistent price pressures.

“This is inconvenient data for the Fed and [any] plan to cut rates relatively soon,” said Dean Maki, chief economist at Point72 Asset Management. “I think this takes a March rate cut off the table, and it makes a May cut unlikely.”

Economists polled by Bloomberg had forecast annual consumer price inflation of 2.9 per cent, down from 3.4 per cent in December.

Core inflation, a closely watched measure that strips out volatile food and energy prices, was 3.9 per cent year on year in January, in line with the previous month.

The dramatic overall fall in inflation over the past year has…