CPI Came in ‘Hot’, US Stock Market Shrugged it Off and Spiked
$DIA, $SPY, $QQQ, $VXX
- The stock market pundits fears about inflation are inflated.
- Econ 101: No Inflation, No Growth
- Top-weighted financials and technology sectors lead market higher
Wednesday, US stocks finished sharply higher, shrugging off an initial sharp decline in futures pre-market immediately after the release of US government data that showed CPI (consumer prices) rose more than expected in January.
The Labor Department said its Consumer Price Index increased 0.5% last month. That was higher than estimates for a 0.3% increase and the 0.2% in December. The Y-Y increase in the CPI was unchanged at 2.1%.
Investors were said to e braced for Wednesday’s Consumer Price Index (CPI) data since concerns about firming inflation were blamed in part for the 10% pullback in the stock market from its 26 January record highs.
There are several reasons why stocks finished higher.
- Despite the higher-than-expected reading, annual inflation did not cause particular alarm. The “core” CPI, excluding the volatile food and energy components, rose 0.3%, the largest increase since January 2017. Still, the Y-Y rise in the core CPI was unchanged at 1.8% in January, and
- Bond yields rose after the inflation data, the rates did not spike to levels that would be more worrisome for equities.
The concern is if bond rates adjust substantially higher in response to inflation data, then the increases in rates would provide more investment competition to stocks, after years of low yields made equities comparatively more desirable.
While yields climbed Wednesday, the benchmark 10-year T-Note had not yet risen significantly above 2.90 in yield, a level that is closely watched.
The Fed whose mandate includes price stability has a 2% inflation target. But, it tracks the different personal consumption expenditures (PCE) price indexes, which has consistently undershot the Fed’s target.
Inflation in context
The Y-Y rate on the core is still below 2%. The core PCE, which the Fed thinks is better, is even lower, well below 2%
Investors in stocks will look to the monthly CPI data much in the same way they have done for the US employment report, obsess about it at the time and move forward.
Wednesday, the major US stock market indexes finished at: DJIA +253.04 at 24893.49, NAS Comp +130.10 at 7143.61, S&P 500 +35.69 at 2698.63
Volume: Trade on the NYSE came in at: 930-M/shares exchanged.
- NAS Comp +3.5% YTD
- S&P 500 +0.9% YTD
- DJIA +0.7% YTD
- Russell 2000: -0.9% YTD
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