Market Rally: ETFs Soar as Inflation Fears Ease
A Breath of Fresh Air for Investors
Wednesday’s consumer price index (CPI) report brought welcome news to investors, as core prices rose less than expected, sparking a rally in stock and bond ETFs. The SPDR S&P 500 ETF Trust (SPY) surged 1.8%, while the iShares 20+ Year Treasury Bond ETF (TLT) jumped 1.7%.
Easing Inflation Jitters
Before the CPI release, investors were bracing for a potential downturn, given the strong economic growth and the Federal Reserve’s concerns about sticky inflation. However, the latest data alleviated some of those fears, pushing Treasury yields down by more than 10 basis points.
Fed Rate Cut Expectations Adjusted
While investors still aren’t counting on significant Fed rate cuts this year, the latest inflation reading reduces the likelihood of aggressive rate hikes. The probability of a single rate reduction in 2025 remains, but the more dire predictions are off the table.
Markets on High Alert
The incoming administration’s threat of heavy tariffs on U.S. trading partners has made markets particularly sensitive to inflation. The S&P 500 Index had fallen 5% from its all-time highs leading up to the CPI report, while the Cboe Volatility Index briefly topped 20 for the first time in a month.
CPI Report Breakdown
The Bureau of Labor Statistics reported that shelter price growth cooled in December, offsetting an acceleration in goods prices. Headline CPI increased 0.4% from November to December, driven by rising energy prices. However, the Fed focuses on less volatile core measures of inflation, which exclude food and energy.
Next Up: PCE Report
The personal consumption expenditures (PCE) price index, the Fed’s preferred inflation measure, will be released on January 31. Inflation as measured by the PCE has been running below that of the CPI, providing further insight into the economy’s inflation trajectory.
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