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. The 6-month yield, in particular, closed at a 15-year high of 5.022%, suggesting that the bond market's pricing in further — and potentially 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.
