Hot CPI Reading Sends Stocks Down, Yields Up

Stocks took a dive on Tuesday, all thanks to January’s inflation numbers that were higher than what most people expected. This jolt in Treasury yields got everyone wondering if the Federal Reserve could really lower interest rates a few times this year – a big hope for those betting on the stock market to do well.

The Dow dropped 495 points, or 1.3%, after slipping over 500 points earlier in the day, marking its biggest tumble since March 2023 when it dipped by 1.63%. The S&P 500 wasn’t spared either, going down 1.3%. The Nasdaq Composite had it rough as well with a 1.6% drop.

The 2-year Treasury yield spiked, crossing the 4.6% mark. The 10-year yield wasn’t far behind, going over 4.27% right after the CPI data came out. Big tech names like Microsoft and Amazon, which had been leading the charge as interest rates fell, were among Tuesday’s biggest losers. Microsoft went down by 1.4%, and so did Amazon.

Everyone was expecting a big drop in the yearly consumer price index, thinking it would go from +3.4% to +2.9%. But, surprisingly (or maybe not so surprisingly), it only fell to +3.1% year-over-year for the headline CPI. This threw a wrench in the hopes for a sub-3% celebration. Month over month, consumer prices went up by 0.3%, a bit more than the 0.2% analysts were guessing.

The rates for shorter terms showed a jump too. The 3-month annualized rate went up to 4% from 3.3%. For the 6-month period, it hit 3.7%, up from 3.2%. Not exactly what you’d call good news.

Core CPI, which leaves out food and energy, dipped below 4% yearly for the first time since May 2021. However, at 3.86% year-over-year, it was still hotter than the expected 3.7%, with prices rising 0.4% month-over-month. This was the biggest jump since April 2023.

Breaking it down a bit, the shelter index went up by 0.6% in January. It was the main reason for the overall monthly increase if you don’t count food and energy. Rent inflation saw a slight decrease to 6.09% year-over-year in January from December’s 6.47%. Shelter inflation also cooled off a bit to 6.04% from 6.15%.

Other indexes on the rise in January included motor vehicle insurance, up by 1.4%, and recreation, up by 0.5%. Medical care wasn’t left behind, with a 0.5% increase. The cost for hospital services went up by 1.6%, while the cost for seeing your doctor rose by 0.6%. On the flip side, prescription drug prices dropped by 0.8%.

The used cars and trucks index fell by a notable 3.4%. New vehicles stayed the same, and apparel prices dipped by 0.7%.

Core service inflation, which is a good indicator of underlying price pressures, picked up month-over-month and accelerated year-over-year. Diving deeper, food, energy, and transportation services costs all saw increases month-over-month.

Looking at the details, the biggest surprise came from the so-called SuperCore: Core CPI Services Excluding Shelter index, which shot up by 0.7% month-over-month. This is the biggest leap since September 2022, pushing the yearly change to +4.4%, the highest since May 2023.

But lower inflation doesn’t mean prices are dropping. In fact, the consumer price index hit a new record high this month, up over 18% since President Biden took office. That’s a stark contrast to the 8% increase during President Trump’s entire term.

And here’s the kicker: with inflation picking up again, wage growth can’t keep up. So, your paycheck isn’t stretching as far as it used to when it comes to covering your bills. The data was certainly damaging, and if the Tuesday lows are taken out, a very nasty selloff could easily follow just a few sessions after the S&P jumped above 5,000 for the first time.


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