“Hot” CPI, Big Bank Earnings Threaten Bulls

Stocks fell this morning in response to hotter-than-expected inflation data. This sparked further skepticism about the Fed’s coming rate cuts, which caused yields to rise.

The S&P dropped by about 0.6% following a close on Wednesday at its highest level since January 2022. The Dow and Nasdaq also saw declines of 0.6%. This week, investors had been grappling with uncertainty as they awaited December’s Consumer Price Index (CPI) reading. The report revealed a 0.3% month-over-month increase (vs. 0.2% expected) and a 3.4% year-over-year rise in prices before the trading opened today. Core inflation, which excludes food and energy, rose 3.9% over the past year and 0.3% month-over-month, matching expectations.

Cleveland Fed President Loretta Mester said in a Bloomberg TV interview that March might be too soon for a rate cut in light of the latest CPI data, emphasizing the need for more progress on inflation. Fed Chairman Jerome Powell also highlighted the ongoing effort to bring inflation back to the 2% target.

Quincy Krosby, chief global strategist for LPL Financial, commented on the inflation data, suggesting that the Fed’s initial rate cut may be postponed beyond what the market is currently expecting.

Despite the recent moderation, core inflation remains well elevated compared to the start of last year. The Federal Reserve’s last rate increase in July brought rates to a 22-year high. New York Fed President John Williams recently reiterated that rate cuts would only be considered when inflation is sustainably moving back towards the 2% target.

Today’s data didn’t help. The CPI report also showed that inflation less housing grew by 3.4% in December, while shelter inflation slowed down. Rent prices within core inflation, however, remained high, with both rent and owners’ equivalent rent indices rising by 0.5% monthly for three consecutive months.

Other Federal Reserve officials, including Fed Governor Michelle Bowman and Atlanta Fed President Raphael Bostic, have called for patience regarding rate cuts, wanting more evidence of declining inflation.

Despite the latest inflation figures, many investors and analysts, like Bank of America US economist Stephen Juneau, still anticipate a rate cut in March, viewing the current data as not significantly altering the Fed’s trajectory.

Juneau’s probably right in that we’ll see a March rate cut, but maybe not for inflation’s sake. Depending on how earnings season goes – it unofficially starts tomorrow morning with the big banks – the Fed may cut due to recession fears rather than inflation optimism.

Falling alongside stocks was Bitcoin, which temporarily shot higher this morning following the SEC’s approval for eleven spot bitcoin ETFs. Coinbase and Marathon Digital saw their shares rise in premarket trading, while Bitcoin surged above $47,000, reaching its highest level since March 2022. Ether also saw a jump in anticipation of potential ETF approval.

That all changed through noon, however, as Bitcoin retraced, falling back to $46,000. Some analysts – myself included – were concerned that the ETF’s benefit had already been priced in over the last few months, which saw huge gains for Bitcoin. Consider also that the spot ETFs give institutions an easier path to short Bitcoin if they so choose.

Looking ahead to earnings, big bank Citigroup announced that it would be taking more than $3 billion in one-time reserves and expenses in its results. If other banks report similar issues, there could be heavy selling that brings down the general market, which would deliver a potential “sucker punch” to bulls following today’s hot CPI figure.


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