U.S. Stocks, Bonds, Dollar Drift On ‘Mood Dampener’ CPI: Markets Wrap

(Bloomberg) -- Wall Street had a hard time finding solid ground after underwhelming inflation data only reinforced speculation Federal Reserve will keep rates elevated for a period before it considers easing policy.

While the report hasn’t altered bets the Fed will be on hold Wednesday, it does bring into question the market’s aggressive pricing of a dovish pivot in 2024. In fact, traders have slightly trimmed their wagers on rate cuts next year, with the first one still projected to happen in May. And the figures also spurred speculation that Jerome Powell will possibly try to throw a bit of cold water on rate-cutting views.

The consumer price index ticked up after being little changed in October, and when stripping out food and energy costs, the so-called core CPI accelerated on a monthly basis as well. Tuesday’s data underscore the choppy nature of getting inflation back in line — particular in the service sector, which the Fed has zoned in on as the last mile in its inflation fight.

“After all the hopes and chatter around near-term rate cuts, today’s CPI report is a little bit of a ‘mood dampener’,” said Seema Shah, chief global strategist at Principal Asset Management. “Simply put, this isn’t enough inflation deceleration to reassert or justify the market’s policy easing expectations, particularly at a time when the labor market is still so solid. Tomorrow, Powell should push back at the recent market narrative.”

After falling in the immediate aftermath of the report, Treasury two-year yields reversed course and rose one basis point to 4.72%. The S&P 500 wavered around 4,600. The dollar was little changed.

More Comments on CPI:

• Quincy Krosby, chief global Strategist for LPL Financial:

“Although inflation continues to ease, the Fed will still not declare total victory as the stubborn, so-called ‘sticky’ inflation is untangling at a slower than expected pace. The market remains steadfast in its belief that the Fed will cut rates as early as this spring, although the Fed may want to keep its options open if its campaign to quell inflation hasn’t completed the more difficult ‘last mile.’”

• Chris Larkin, managing director of trading and investing at E*Trade from Morgan Stanley:

“It won’t impact Fed actions tomorrow, but today’s slightly high CPI should cause pause for investors counting on early-2024 rate cuts. Knocking inflation down from last year’s highs is one thing, getting it to the Fed’s 2% target is another. The Fed has been very clear they feel the risk of cutting rates too soon outweighs the risk of keeping them elevated for a longer period of time. Today’s number aside, though, the trends still point to a slowing economy and cooling inflation. That means lower rates are still on the 2024 horizon, just not as near as some people may be hoping.”

• David Russell, Global Head of Market Strategy at TradeStation:

“Markets had a lot of optimism coming into CPI and now they could feel a little bit disappointed. The trend continues to be lower, but Jerome Powell may not want to rush cutting rates. Today’s inflation report might give investors some pause, given their big gains in recent weeks.”

• Michelle Cluver, portfolio strategist at Global X:

“Markets went into this report expecting a softer print. But overall, this report came in very close to market expectations and is unlikely to have any meaningful impact on near-term interest rate expectations. The Fed is expected to remain on hold at tomorrow’s FOMC meeting, but the focus is on whether there is an update to the number of cuts reflected in the dot plot for next year.”

• Jamie Cox, managing partner for Harris Financial Group:

“Higher rates are having the desired effect—inflation is returning to target. The trick now is make sure the policy which broke the back of inflation does not boomerang and stall the economy into recession. The Fed now has a very narrow path to prevent the latter from occurring.”

• Jason Pride, chief of investment strategy and research at Glenmede:

“The risk is that the Fed may need to keep rates elevated for longer than markets are currently expecting, if it hopes to keep the inflation bogeyman at bay for good.”

• Sonu Varghese, global macro strategist at Carson Group:

“The big picture is that we remain on the path to lower inflation, though this month’s report is a reminder that the disinflation process will not be a straight line down, and there will be bumps along the way.”

• Bret Kenwell, options investment analyst at eToro:

“Overall, inflation continues to moderate and remains well off the highs, although the fight to get back down to 2% will clearly have some hurdles. Investors will likely remain focused on the timing of the first rate cut vs. worried about another rate hike.”

“Markets have been front-running the rate-cut trade for weeks now. A lower-than-expected inflation result would have likely increased odds that we get a rate cut in March. Lacking that outcome this morning, perhaps this acts as an excuse for the market to pull back a bit, or at the very least, consolidate.”

• John Leiper, chief investment officer at Titan Asset Management:

“With core inflation at 4% this isn’t the best news but, equally, will do little to derail the prevailing narrative that peak rates are in.”

• Florian Ielpo, head of macro multi-asset group at Lombard Odier Asset Management:

“This inflation print is a baby step in the right direction, and no one can argue about that, but the longer inflation remains elevated and the higher the chances of seeing second-round effects.”

• Chris Zaccarelli, chief investment officer at Independent Advisor Alliance:

“The data this morning was unsurprising and even though tomorrow’s Fed rate decision was never in doubt, there is nothing in this report that should stop the Fed from staying on hold well into next year and potentially beginning rate cuts in the second half of 2024. We see a Fed that will just keep rates higher for longer and be patient for inflation to come back down.”

• Sam Millette, director of fixed income for Commonwealth Financial Network:

“Ultimately, there were no major surprises in the report and the data is not expected to meaningfully impact the Federal Reserve’s rate decision.”

Corporate Highlights:

• Google’s legal defeat at the hands of maker Epic Games Inc. threatens to roil an app store duopoly with Apple Inc. that generates close to $200 billion a year and dictates how billions of consumers use mobile devices.
• Oracle Corp. reported slowing quarterly sales growth in its cloud computing business, fueling investor fears that the software maker’s expansion efforts have yet to gain ground in the competitive market.
• Macy’s Inc. was cut to sell at Citigroup Inc. on skepticism that a buyout offer from Arkhouse Management and Brigade Capital Management will actually materialize.
• Walt Disney Co. and Reliance Industries Ltd., led by Asia’s richest tycoon Mukesh Ambani, are expected to sign a non-binding pact as early as Monday to merge their media operations in India in a cash-and-stock deal, according to people familiar with the matter.
• Country Garden Holdings Co., the Chinese builder whose liquidity crunch shook the nation’s financial markets, is likely to avoid its first default on yuan bonds after most holders of a local note agreed not to demand repayment this week, people familiar with the matter said.

Key events this week:

• Eurozone industrial production, Wednesday
• US PPI, Wednesday
• Federal Reserve policy meeting and news conference with Chair Jerome Powell, Wednesday
• European Central Bank policy meeting followed by news conference with ECB President Christine Lagarde, Thursday
• Bank of England policy meeting, Thursday
• Swiss National Bank policy meeting, Thursday
• US initial jobless claims, retail sales, business inventories, Thursday
• China 1-yr MLF rate and volume, property prices, retail sales, industrial production, jobless rate, Friday
• Eurozone S&P Global Manufacturing PMI, S&P Global Services PMI, Friday
• US industrial production, Empire manufacturing, cross-border investment, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 was little changed as of 10:31 a.m. New York time
• The Nasdaq 100 rose 0.2%
• The Dow Jones Industrial Average rose 0.2%
• The Stoxx Europe 600 fell 0.2%
• The MSCI World index was little changed

Currencies

• The Bloomberg Dollar Spot Index fell 0.1%
• The euro rose 0.2% to $1.0786
• The British pound was little changed at $1.2548
• The Japanese yen rose 0.4% to 145.61 per dollar

Cryptocurrencies

• Bitcoin rose 0.3% to $41,304.93
• Ether fell 1.1% to $2,193.49

Bonds

• The yield on 10-year Treasuries declined one basis point to 4.22%
• Germany’s 10-year yield declined five basis points to 2.22%
• Britain’s 10-year yield declined 12 basis points to 3.96%

Commodities

• West Texas Intermediate crude fell 3% to $69.18 a barrel
• Spot gold was little changed

This story was produced with the assistance of Bloomberg Automation.

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