Grace Cary | time | Getty Images
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US inflation is starting to bite again. But stocks have generally ignored it.
What you need to know today
- The US consumer price index for January rose 0.5%, higher than the 0.4% expected by economists. Year-over-year, prices rose 6.4%, compared to the 6.2% forecast. Egg prices were still very high.
- US stocks closed on Tuesday mixed. The Dow Jones Industrial Average and S&P 500 fell slightly, while the Nasdaq Composite rose. After a positive trading day, Asia-Pacific stocks mostly finished lower, with only Chinese companies Shanghai Composite and Shenzhen Component remaining in the green.
- Yields on US Treasuries climbed after a hotter than expected inflation report. The 6-month Treasury, in particular, jumped to close at 5.022%, its highest yield since July 2007.
- PRO US Treasury yields are exploding again. The 10-year Treasury yield hit a five-week high this week, while the 2-year yield rose 0.41 percentage points in February alone. This is how the pros would play the market.
The bottom line
January’s warmer than expected CPI report cast a shadow over US markets yesterday.
Prices in the United States last month rose faster than economists expected; they were pushed up by rising food, energy and housing prices. Yet even the core CPI – which excludes the more volatile food and energy prices – recorded a monthly rise of 0.4% and a jump of 5.6% year-on-year. Both exceeded estimates by 0.3% and 5.5% respectively.
Is the disinflationary process – in the words of Federal Reserve Chairman Jerome Powell – still underway in the United States? January’s core CPI of 5.6% is just a tiny notch lower than December’s 5.7%, meaning prices continue to decline. But barely.
US markets reacted accordingly. Yields on Treasuries rose, suggesting that investors are anticipating higher interest rate hikes from the Fed. Stocks fell. The Dow Jones slid 0.46% and the S&P 0.03%. However, the Nasdaq, traditionally the most interest-rate sensitive index, closed 0.57% higher, supported by a 7.51% rise in Tesla and a 5.43% jump in Nvidia.
Although stocks have mostly fallen, they have been remarkably resilient. A JPMorgan team had predicted that the S&P would fall between 0.75% and 1.5% if the annual CPI hit 6.4%. The actual drop in the index: only 0.03%.
The strange disconnect between bond markets and equity markets continues. Investors could be optimistic that consumer spending will remain strong even amid rising prices – as Coca Cola’s earnings report indicates – allowing the economy to continue to grow. As for that theory, Wednesday’s US retail sales report will put it to the test.
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