Wall Street experienced a stormy Tuesday after the preliminary release of warmer-than-expected January consumer inflation data. In response, bonds sold off, pushing the 10-year yield above 4.30% and stock prices significantly lower. The Dow, S&P 500 and Nasdaq fell more than 1.5% as odds of a Federal Reserve rate cut in May fell to 33% from earlier levels of more than 61%, according to the CME FedWatch Tool. The headline consumer price index (CPI) number rose 0.3% in January versus the 0.2% expected and rose 3.1% year-on-year versus the 2.9% expected. The key interest rate, excluding food and gas prices, rose 0.4% month-on-month versus 0.3% expected and rose 3.9% year-on-year versus 3.7% expected. Jim Cramer has long said the economy remains too strong for a rate cut anytime soon. Tuesday’s CPI print interrupted a series of numbers indicating cooling inflation trends. Whether or not this is a one-month blip remains to be seen. But in an economy as resilient as we’ve seen in the face of 11 rate hikes starting in March 2022, the risk of a resurgence of inflation is always a concern. Housing costs, which account for about a third of overall CPI and even more at the core level, continued to stand out as the main area of stickiness. Within services, the shelter component was an upside surprise, up 0.6% month-on-month and 6% year-on-year. Other sources of upward pressure on the core CPI came from medical care, up 0.7% month-on-month and 0.6% year-on-year, and transportation, up 1% month-on-month and 9.5% year-on-year. In contrast, still focusing on the key index, commodities with a weighting of about 19%, fell 0.3% both month-on-month and year-on-year, new vehicle prices were unchanged month-on-month but rose 0.7% year-on-year. Used cars and trucks were down 3.4% month-over-month and 3.5% year-over-year. Apparel fell 0.7% month-on-month and rose just 0.1% year-on-year. and medical care products fell 0.6% month-on-month, although they rose 3% year-over-year. In other words, the prices of services continue to rise at excessively high rates while the reduction in the cost of goods does not prove to be sufficient to compensate them. So how do we play this? Obviously, a resurgence of inflation for a prolonged period would be clearly negative, resulting in higher bond yields – and subsequently lower stock prices. However, we are not ready to come to this conclusion based on the one month report – especially considering that the CPI headline print is below December’s level and the core indicator is in line with what we saw in December. We are by no means dismissing this January reading. Rising inflation is absolutely a risk that needs to be respected and monitored. However, we are not ready to show a fall in the stock market with this release alone. For starters, January’s CPI supports the view that the Fed has not tightened too much and is justified in keeping interest rates higher for longer. At least there is no rush to cut for fear of a “hard landing” for the economy. Jim said that the discussion of a “hard landing” versus a “soft landing” coming from such an aggressive Fed tightening cycle should really be a “no-landing,” meaning an economy that drifts and inflation continues to mitigates. Again, we should reassess whether January’s numbers are the start of a multi-month rise in price pressures. The funny thing about inflation is that while on the one hand it negatively affects demand due to reduced affordability, it is also supported by demand. The only way high prices can be sustained in a free market economy is because there is still enough demand at those higher prices. Thus, the saying, “The best cure for high prices is high prices.” In other words, there is demand for goods and more for services. This is positive for corporate sales and profits, at least in nominal terms. Therefore, we believe that the decline in the stock market is buyable. Bottom Line As of Monday’s close, the S&P 500 Short-Range Oscillator was fairly neutral – neither oversold nor overbought. We’ll have to see if Tuesday’s decline tips the scales into oversold. And just like how the one-month CPI reading doesn’t trend, so does the market. This year has been strong for the most part. There was some weakness at the start and some weak sessions like Tuesday. So the next few days in the market will tell us if we are in trouble or if the market just had to crawl kicking and screaming to the fact that it was pretty crazy compared to what the Fed was saying and now the market needs to lower its expectations for a reduction in interest rates for this year. (See here for a complete list of Jim Cramer’s Charitable Trust holdings.) 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Traders work on the floor of the New York Stock Exchange during afternoon trading on February 5, 2024 in New York City.
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Wall Street experienced a stormy Tuesday after the preliminary release of warmer-than-expected January consumer inflation data. In response, bonds sold off, pushing it 10-year bond yield over 4.30% and share prices plummeted. The DowThe S&P 500 and Nasdaq All fell more than 1.5 percent as odds of a May Federal Reserve rate cut fell to 33 percent from earlier levels of more than 61 percent, according to the CME FedWatch Tool.
The general consumer price index The (CPI) number rose 0.3% in January vs. 0.2% expected and rose 3.1% year-on-year vs. 2.9% expected. The base rateexcluding food and gas prices, they rose 0.4% month-on-month vs. 0.3% expected and 3.9% year-on-year vs. 3.7% expected.