So much for more rate cuts! The first CPI print of the year just came in way hot. That immediately spiked bond yields, and sent stocks tumbling about 1% pre-market.
Let's back up for a second. Going into this January print, there has been months of discussion about what would happen with inflation in the first several months of this year. That's because last year saw a frightening and surprising uptick in inflation that resulted in only three Fed rate cuts in 2024.
This time was supposed to be different. Just yesterday, Goldman put out a note predicting "Less of a Q1 Bump in Inflation," saying the "January effect" of post-Covid seasonal adjustment problems should now be smaller, and there is "no reason for last year's noise" to repeat.
Now, in fairness, Goldman is specifically talking about the Fed's preferred inflation gauge (the PCE index), and not the much more well-known CPI report we got this morning. We have to wait until the end of the month for that report, though, and directionally the two inflation reports often move in the same direction.
So what's going on? Specifically, headline CPI hit 3% year-on-year again last month after January showed a very hot 0.5% monthly increase. The headline does include food and gasoline prices, but according to their data, food prices were up just 0.3% on the month, and 2.5% on the year, despite huge moves in certain categories like eggs, coffee, and chocolate.
The core was even worse. Its half-point jump last month pushed the yearly increase up to an uncomfortably high 3.3%. "See ya in June," wrote John Spallanzani of Miller Value Partners after the release--meaning that's the soonest the market will now really expect any more rate cuts.
Housing and shelter costs, the biggest component of core inflation, were on the higher end last month, up 0.4%. Transportation and medical costs were up more than 1%! Used car and truck prices surged more than 2%.
Money Report
So while it's entirely possible that this will prove a one-off, in order to actually prove that, the market will need (a) the PCE to come in cool later this month, (b) at least a couple more months of CPI data to calm down as well, and (c) no tariff inflation to worry about in the near term.
Until it gets all that, the bond market will remain in a bad mood. The 10-year jumped to 4.64% after the report today, pushing mortgage rates back up. As for stocks, you'd expect all of this to favor names and sectors like the "Mag 7" that can better cope with high rates and inflation--but the Nasdaq is underperforming the small-cap Russell 2000 today.
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President Trump is still pushing for lower rates, writing on social media this morning that they should go "hand in hand with upcoming Tariffs." That may now be a pipe dream. Treasury Secretary Bessent recently added that the White House is focused just as much on the 10-year Treasury yield and getting that down--but that just got tougher as well.
See you at 1 p.m!
Kelly
