After Hot CPI Data, Stocks Fall and Bonds Gyrate

The recent session on Wall Street unfolded with considerable volatility, witnessing a decline in stocks and uncertainty in the bond market. This market turbulence ensued after inflation data surpassed expectations, subsequently tempering speculations about an impending rate cut by the Federal Reserve in March.

‍

The S&P 500 experienced a reduction in its weekly gains, primarily driven by losses in major companies like Tesla Inc. and Apple Inc. Simultaneously, Treasury 10-year yields exhibited minimal changes but maintained levels above 4%. Fed swaps indicated a reduced expectation of monetary easing in 2024, and the dollar exhibited an upward trend. Notably, Bitcoin surged past $49,000, marking the initiation of trading for the first U.S. exchange-traded funds directly investing in the cryptocurrency.

‍

The Consumer Price Index (CPI) revealed a 3.4% increase in the year through December, marking the highest level in three months. On a monthly basis, the CPI exceeded forecasts, and the CPI excluding food and energy rose by 0.3% in December compared to the previous month. The annualized core measure, excluding volatile components, showed a 3.9% increase.

‍

Financial experts offered varied perspectives on the reaction to the CPI data. Chris Larkin at E*Trade emphasized that a few data points might not alter the Fed's course but noted that the Fed has adhered to its stated plans over the past years. The current stance is one of readiness to maintain high rates or raise them further in response to potential inflationary pressures. He suggested that the recent data, indicating stronger-than-expected inflation alongside a solid labor market, may not accelerate the Fed's rate cut timeline.

‍

Krishna Guha, vice chairman at Evercore, expressed the belief that the Fed would not be perturbed by the December CPI report. While acknowledging the overall disinflation trend, Guha did not see evidence pointing to an accelerated disinflation process that might prompt the Fed to consider rate cuts as early as March.

‍

Quincy Krosby, chief global strategist at LPL Financial, highlighted that inflationary pressures persist above expectations, and the "last mile" of reaching the final inflation goal may require more time. She suggested that the CPI report indicates a potential delay in the Fed's initial rate cut, contrary to market hopes.

‍

Seema Shah, chief global strategist at Principal Asset Management, asserted that the market had become overly optimistic about the timing of rate cuts, emphasizing that the data does not signal a downturn but rather reflects slow progress in disinflation. She speculated that the stars could align for Fed cuts around mid-year.

‍

Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, underscored that the most crucial aspect for investors is that the Fed has concluded its rate-hiking cycle. He suggested that the specific timing and frequency of rate cuts should matter less as long as the economy avoids recession.

‍

Michael Shaoul, CEO of Marketfield Asset Management, found nothing troubling in the report, except the indication that CPI might persist above the 3% level. He suggested that the market may not be overly troubled at this point but acknowledged that economic data and market expectations might become incompatible in the near future.

‍

Jon Maier, CIO at Global X, emphasized the unpredictable nature of economic recovery, advising investors to temper their expectations and remain vigilant. He suggested that markets may need to brace for potential volatility, especially if the Fed maintains or intensifies its restrictive monetary policy in response to inflationary pressures.

‍

John Leiper, CIO at Titan Asset Management, considered the CPI uptick a reminder that disinflation is a gradual process. He speculated that March is less likely for a rate cut while increasing the probability of a cut in June.

‍

Charlie Ripley, senior investment strategist at Allianz Investment Management, noted that the resilience shown in the latest inflation data reduces the urgency for the Fed to consider a near-term rate cut. Instead, he suggested the focus might shift to discussions about the balance sheet.

‍

Jeff Schulze, head of economic and market strategy at ClearBridge, concluded that the inflation data confirmed the non-linear nature of the disinflation process, requiring patience from the Fed before officially transitioning to an easing cycle