Consumer price index data for December showed that core price pressures eased more than expected. The S&P 500 powered higher as Wall Street weighed the CPI's implications for Federal Reserve policy as well as positive earnings reports from Dow Jones giants JPMorgan Chase and Goldman Sachs.
However, stubbornly high inflation still presents a tough challenge for the Federal Reserve and the S&P 500 as President-elect Donald Trump is set to take office, because his policies are seen as likely to contribute to higher prices this year. Going into this morning's report, markets didn't expect the next Fed rate cut to come before June. That's still the case, despite better-than-expected data.
CPI Inflation Hits And Misses
The overall CPI rose 0.4% on the month, above 0.3% forecasts. That lifted the 12-month headline inflation rate to 2.9%, which matched expectations.
The core CPI rose 0.2%, just below views. The 12-month core inflation rate unexpectedly dipped to 3.2% from 3.3%.
CPI Inflation Details
Core goods prices rose a tame 0.1%, despite a 0.5% rise in new vehicle prices and 1.2% bump in prices of used cars and trucks. Core services prices rose 0.3% for a third consecutive month.
Owner's equivalent rent, the biggest component of the core CPI, rose 0.3%. Hotel and motel prices unexpectedly slipped 1.2%.
The CPI measure of airline fares rose 3.9%, below the 7.2% increase in the producer price index. However, the Fed's primary inflation gauge, the core PCE price index, uses the PPI measure of airfares.
CPI Vs. PCE Inflation
The Federal Reserve looks to the core PCE price index as its primary inflation rate. The core PCE price index, which will next be released on Jan. 31, gets about 70% of its movement from CPI inputs and much of the rest from the producer price index, which was released on Tuesday.
The good news from the PPI is that health care services prices, the biggest component of the core PCE price index, were unchanged in December.
Factoring in both the PPI and CPI, Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, expects the core PCE price index to rise by 0.2% in December, keeping the 12-month core inflation rate at 2.8%.
The "relatively benign" data "should douse speculation that the Fed's next move will be to tighten policy," Tombs wrote.
Goldman Sachs, JPMorgan Crush Views In Slew Of Bank Earnings
Fed Rate-Cut Odds
Fed rate-cut odds improved, but markets still aren't betting on a rate cut before the June 18 Fed meeting. At that point, odds stand at 68% for a rate cut, up from 57% on Tuesday, according to the CME Group FedWatch tool.
Prior to the June Fed meeting, markets are pricing in 3% odds of a rate cut on Jan. 29, 28% on March 19 and 47% on May 7.
Markets now see 50-50 odds that the Fed will cut by 50 basis points this year, not just 25 basis points. Odds of no cut fell to 16% from 26%.
January Inflation Data Looms Large
Last year got off to a rough start for inflation, with a 0.4% rise in the core CPI and 0.5% rise in the core PCE price index. Those high readings offer hope of a substantial improvement in the 12-month inflation rate in January.
Companies frequently raise prices to start the year if the economy is on a firm footing. Yet official inflation gauges don't tend to treat those increases as if there is a seasonal element to them. That's resulted in high inflation readings to start the year.
However, Tombs thinks the Bureau of Labor Statistics may start to treat a bigger portion of January price increases as seasonal in nature this year.
Wall Street Reacts To CPI Inflation
"Today's CPI should provide a boost to markets, relieving some of the anxiety that the U.S. is at the beginning of a second inflation wave," wrote Seema Shah, chief global strategist at Principal Asset Management.
Still, she expects markets to be "whipsawed" as Wall Street looks for confirmation of this new narrative in upcoming data releases.
Trump Agenda Is Main Inflation Concern
Despite today's stock market rally on the better inflation data, markets still seem to be keeping the incoming Trump administration on a short leash. The 10-year Treasury yield has only backed down to 4.65%. Market strategists think a potential move to 5% would be a tough climb for the S&P 500 to weather in the near term.
President-elect Trump is expected to roll out tariffs when he takes office next Monday, though they may phase in gradually. Stepped-up deportations and tighter immigration may also weigh on growth. However, tax cuts and bigger fiscal deficits could work in the other direction.
Today's report wasn't good enough to be a game-changer when so much uncertainty lies ahead. However, the fear factor is down for now, and markets are showing resilience.
S&P 500
The S&P 500 rose 1.7% in early Wednesday stock market action after the CPI. The S&P 500 is trying to retake its 50-day moving average, climbing for a third straight session after closing on Friday at its lowest level since the day after Trump's election victory.
The S&P 500 finished 4.1% below its Dec. 6 all-time closing high on Tuesday.
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