Market Rally Sparks Hope, But Inflation Fears Linger
The latest consumer price index (CPI) report brought a sigh of relief to the markets, triggering a sharp rally in stocks and bonds. However, traders and investors remain cautious, aware that the path ahead is still shrouded in uncertainty.
Fed Rate Cuts and Trump’s Policies in Focus
The Federal Reserve’s interest rate cuts and President-elect Donald Trump’s actions on taxes and tariffs are key factors influencing market sentiment. Art Hogan, market strategist at B. Riley Wealth, notes that “the issues driving rates higher and weighing on stocks are still present.” The uncertainty surrounding Trump’s policies, particularly tariffs, could impact inflation and growth.
Core CPI Provides a Glimmer of Hope
While the December CPI rose at a faster-than-expected pace, the core CPI, which excludes food and energy components, increased by 0.2%. This modest beat sparked a strong reaction from traders, with the S&P 500 surging 1.8%. The 10-year Treasury yield reversed its losses, falling to 4.66%.
Markets Seize on Any Positive News
Steve Sosnick, market strategist at Interactive Brokers, observes that “traders pounce aggressively on any whiff of good news.” This reaction may be magnified by the prevailing negativity in the market.
Inflation Concerns Persist
Despite the positive CPI report, fears about the potential impact of Trump’s policies on inflation remain. Fed officials acknowledge heightened uncertainty in the coming months, awaiting clarity on the incoming administration’s policies. Rick Rieder, BlackRock’s chief investment officer of global fixed income, notes that progress on inflation may be slow and uneven due to the uncertainties surrounding fiscal policy changes.
Volatility Ahead
As the market remains data-dependent, volatility could become more common. Kevin Flanagan, head of fixed income strategy at WisdomTree, expects daily moves of 10 to 15 basis points for the 10-year Treasury to become the new norm.
Fed Rate Cuts Still on the Table
Following the CPI report, traders of interest-rate futures still project the Fed waiting until June to deliver its next rate cut. However, they now price in even odds of a second rate cut by year’s end. Tina Adatia, head of fixed income client portfolio management for Goldman Sachs Asset Management, notes that the CPI data strengthens arguments for further cuts, but “the Fed has scope to be patient.”
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