U.S. consumer prices rose more than expected in January, according to the latest data from the Bureau of Labor Statistics released Tuesday morning.
Investors had been watching the paper closely for clues as to when the Federal Reserve would begin cutting interest rates. Markets are now pricing in a nearly 80% chance that the Fed will cut interest rates in June, contradicting earlier expectations that the central bank would begin cutting rates in May.
“This was a bad report for those betting that the Fed will soon start cutting interest rates,” wrote Eugenio Aleman, chief economist at Raymond James, in response to the hotter-than-expected release.
Ellen Zentner, chief U.S. economist at Morgan Stanley, added: “The acceleration in core PCE is consistent with our view of a bumpy future. We expect sequential numbers in the first quarter of 2024 to be higher overall than we have seen in the last 6 months. This acceleration will be a factor that delays the decision to start cutting rates until June this year.
Citi, meanwhile, warned that hot inflation was likely to have an impact on the recent stock market rally.
“A strong core CPI is not a game changer, but will likely lead to a short-term decline,” wrote Stuart Kaiser, head of U.S. equity trading strategy at Citi. “With strong growth data in the background, it will be difficult for the Fed to cut rates as early as some investors had hoped, fueling market concerns about an overheating scenario despite very hawkish policy.”
“We should see a decline here, perhaps in the 2-4% range, but that will be somewhat limited by the fact that the economy is still quite strong,” he continued.
Stocks fell in early trading following the report, while the yield on the 10-year Treasury note (^TNX) rose about 10 basis points higher, trading at about 4.3%.