By There wasn’t much for investors to cheer in the latest inflation update.
Consumer prices in January rose 0.5% for the month and 3% on a year-over-year basis, according to the Bureau of Labor Statistics. That’s slightly hotter than than the 2.9% increase recorded in December, and hotter than what economists were expecting.
Hotter prices are reigniting concern that the Federal Reserve may not have room to cut interest rates as much as markets have been anticipating this year.
“Today’s US inflation report will strike fear in the hearts of Federal Reserve officials, and will likely encourage the FOMC to sit on its hands for the foreseeable future,” Matthew Ryan, head of market strategy at financial services firm Ebury, said.
“To make matters worse, we see little reason to suggest that price pressures will ease any time soon: wages are continuing to grow at a strong pace, consumer demand is robust and President Trump’s tariffs look set to push up imported prices.”
Here’s how markets are reacting to the January CPI data.
Stocks
US stocks sold off sharply after the report.
All three benchmark indexes traded lower, with the S&P 500 and the Nasdaq Composite down almost 1%around 10:00 a.m. ET. The Dow Jones Industrial Average was down more than 400 points.
Many of the market’s top tech names tumbled. Nvidia, Amazon, Alphabet, and Meta dropped by about 1% shortly after the opening bell.
“Not only will this create tremendous psychological damage to investors, but the market will likely have a negative knee-jerk reaction to the increasing risks of higher-for-longer or even higher-from-here, so caution is warranted,” Chris Zaccarelli, chief investment officer at Northlight Asset Management, said of the inflation report.
Bonds
Bond yields spiked, a sign that investors see rates trending higher in the face of sticky inflation.
Expectations for rate cuts at coming Fed meetings were recalibrated after CPI. Markets think the probability that rates remain unchanged through the middle of the year has risen. According to the CME FedWatch Tool, investors see a 63% chance the Fed will hold rates steady in June, up from about 50% on Tuesday. The October meeting is now the earliest that a majority of market participants see a rate cut coming this year.
The yield on the 10-year US Treasury note jumped 10 basis points to 4.643%, vaulting past the important psychological threshold of 4.5%. The yield on the 30-year US Treasury note climbed nine basis points to 4.845%.
That marks the highest the 10-year and 30-year yields have been since the week leading up to Donald Trump’s inauguration, when investors fretted that the president’s economic policies could cause inflation and interest rates to remain elevated.
“The Fed might be more prone to wait things out and see where the dust settles rather than making a move before it’s sure what tariff policy will be and how long it will last,” Richard Flynn, the managing director of Charles Schwab’s UK arm, said. “As a result, we do not expect a change in interest rate policy for at least the first half of 2025.”
