January's hotter-than-expected CPI report cast a shadow over U.S. markets yesterday.
Prices in the U.S. last month increased faster than economists had anticipated; they were pushed up by higher food, energy and housing costs. Yet even the core CPI — which strips out the more volatile food and energy prices — saw a monthly bump of 0.4% and a year-over-year jump of 5.6%. Both exceeded respective estimates of 0.3% and 5.5%.
Is the disinflationary process — in the words of Federal Reserve Chair Jerome Powell — still in play in the U.S.? January's core CPI of 5.6% is a tiny notch lower than December's 5.7%, which means that prices are still tapering off. But just barely.
U.S. markets reacted accordingly. Treasury yields rose, suggesting that investors are pricing in higher interest rate hikes by the Fed. Stocks fell. The Dow slipped 0.46% and the S&P dipped 0.03%. However, the Nasdaq, traditionally the most interest rate-sensitive index, closed 0.57% higher, buoyed by a 7.51% surge in Tesla and a 5.43% jump in Nvidia.
Though stocks mostly fell, they were remarkably resilient. A team at JPMorgan had forecast that the S&P would sink between 0.75% to 1.5% should yearly CPI come in at 6.4%. The actual drop in the index: only 0.03%.
The strange disconnect between bond markets and stock markets continues. Investors might be optimistic that consumer spending will remain strong even amid rising prices — as Coca Cola's earnings report indicated — hence allowing the economy to keep growing. As for that theory, Wednesday's U.S. retail sales report will put it to the test.
