Stocks fluctuate in wake of US inflation report

Stocks fluctuated as inflation data did little to alter bets the Federal Reserve will be able to cut interest rates this year - even if it keeps its cautious stance for now.

Equities struggled to find direction after a report showed inflation marginally topped forecasts. Bonds fell ahead of this week’s remaining auctions - a 10-year note at 1 p.m. New York time and a 30-year bond on Wednesday - and a growing slate of new corporate bonds.

The core consumer price index, which excludes food and energy costs, increased 0.4% from January, according to government data out Tuesday. From a year ago, it advanced 3.8%. The so-called supercore measure - core services prices excluding shelter - rose 0.47% on the month. That’s down from a super-hot 0.85% in January but still too fast a pace for Fed policymakers.

“Fears has been circulating prior to the release for an extra-hot print, which appears to have boosted markets as they failed to materialize,” said Josh Jamner at ClearBridge Investments. “Overall, there should be relatively little market impact from today’s release given it is largely consistent with the prior understanding of the disinflationary process.”

The S&P 500 hovered near 5,120. Treasury two-year yields rose three basis points to around 4.55%. The dollar was little changed.

More Comments on CPI:

— Bret Kenwell at eToro:

US inflation showed January’s upside surprise was not an anomaly, but investors are likely less concerned with the actual inflation numbers and are more focused on whether this changes the expectation for a Fed rate cut in June. Remember, markets crave certainty. So regardless of whether the inflation print is ideal, investors mostly want to know whether they can count on what’s expected - and right now, that’s for a June rate cut.

The fear is that this report could trigger a “higher for longer” approach from the Fed, but we’ll get more information at next week’s FOMC meeting.

— Chris Larkin at E*Trade from Morgan Stanley:

Another hotter-than-expected CPI reading may breathe new life into the sticky inflation narrative, but whether it actually delays rate cuts is a different story. For months, the story has been the same - the markets have overestimated how quickly the Fed would act, and the Fed has been nothing if not consistent in doing what it said it would do. Until they say otherwise, their plan is to cut rate cuts in the second half of the year. “Sticky” doesn’t necessarily mean “overheating.”

— Quincy Krosby at LPL Financial:

The last mile towards price stability just got longer. Much of core inflation remains “sticky” and isn’t unwinding at a pace that would offer the Fed the confidence it needs to begin the easing cycle perhaps even in June.

What could help underpin a move in June or July, however, is that Owners Equivalent Rent (OER) has begun to tick lower, and given its heavy weighting in the CPI a continued downward trajectory by June or July could certainly assuage Fed concerns regarding inflation remaining stubbornly higher.

Still, the FOMC has been clear in its orchestrated message to the markets, that it requires more than one month of cooler data.

Today’s report suggests that while the last mile towards 2% has become a bit longer, the underlying report offers a modicum of hope that by June or certainly July the Fed should feel more comfortable that they’re increasingly closer to their destination.

— Jason Pride at Glenmede:

Like a piece of gum stubbornly stuck to the bottom of their shoes, sticky services inflation is a problem that the Fed just can’t shake. Today’s report likely doesn’t change the Fed’s calculus all too much, as it still seeks evidence of sustainably waning inflation before cutting rates. The base case remains roughly three rate cuts this year beginning sometime around summer.

— Rob Swanke at Commonwealth Financial Network:

The good news from the print is that real average hourly earnings increased by 1.1% and more importantly real average weekly earnings increased by 0.5% indicating that the consumer should have increased spending power. This should help keep the economy moving forward, but it will likely keep the Fed from cutting rates for a few more meetings. The market still expects June to be the first possible rate cut.

— Harry Richards at Jupiter Asset Management:

Whilst the data out of the US today beat market expectations, we see the Shelter component of core CPI waning, as the year progresses. This will prove a key driver in allowing the Fed to justify easing policy towards a neutral level, from the current highly restrictive state. We are closely monitoring labour market developments to ascertain whether the cutting cycle may have to be more aggressive than is currently priced.

— Michael Shaoul at Marketfield Asset Management:

In summary, although a lot of progress was made over the last 18 months, the majority of it took place in the first 12 months of this period, which much less progress since then. We do not yet see any signs of a resurgence in CPI in the report, but the risks look much more balanced than the general consensus indicates, including that which has taken hold within the FOMC.

— Skyler Weinand at Regan Capital:

With inflation coming in slightly hotter-than-expected, we think it’s a coin flip as to whether the Fed cuts interest rates in June or if it takes a more conservative approach and waits until September. The last mile of price stability is proving to be the hardest.

The Fed usually cuts interest rates to get ahead of an impending economic slowdown, and with the economy running so strong currently, it’s difficult to justify any rate cuts this year. Still, the Fed is likely to cut interest rates one or two times this year, as an acknowledgement that inflation has meaningfully decelerated, even if it’s not quite fully back to its 2% target.

The stock market has seen a full year’s worth of gains in just the first two months of the year, which is quite a feat for markets, and while it’s natural to expect the market to cool down a bit, it’s proving difficult to see what may stop the market’s momentum, as earnings, inflation, and interest rates are moving in the right direction.

— George Mateyo at Key Private Bank:

The Fed will likely be unmoved by today’s CPI reading, and may instead revisit recent trends within the labor market which show signs of cooling potentially opening the door for rate cuts this summer. But with core inflation slightly above expectations and wages still rising faster than their comfort zone, they’re unlikely to aggressively alter their stance.”

Core was not a bore, but it may be one report the Fed may choose to ignore.

That said, the underlying components were a mixed bag and might be considered as more noise after a noisy set of data released in January.

— Mark Hamrick at Bankrate:

If there’s some good news here that people were looking for, it is that food prices were flat on the month overall. Half of the six major grocery categories were down last month.

What does the Federal Reserve take away from this? Mainly, it will be looking for more data given that it is already taken a March rate move off the table. Officials have said they can afford to be patient as they consider when and if to cut rates. They’d feel more comfortable about rate reductions if inflation were to be less sticky. The slightly stronger than expected CPI doesn’t do much to add to their confidence, but they can still ponder the possibilities for May, June, and July.

— Sonu Varghese at Carson Group:

Today’s data validates the Fed’s decision to be patient, with headline and core inflation on the hotter side. There was encouraging news below the headlines, with shelter inflation pulling back from January, as well as easing in food services inflation.

The big picture is that inflation is trending lower, just not as fast as everyone wants thanks to two months in a row of firmer inflation data.

It means that we’re still on track for interest rate cuts in 2024, but less than what the market expected at the beginning of the year.

— Richard Flynn at Charles Schwab UK:

Today’s figures show that the rate of inflation has increased compared to last month. We may see this trigger a shift in direction within markets in the coming days.

In reality, the stock market is behaving more like a duck than a bull: calm on the surface, but paddling frantically below. While in and of itself, investors’ exuberance is not a reason for stocks to enter a correction, today’s jump in inflation may be the negative catalyst needed to bring valuations back down to earth.

— Ian Lyngen at BMO Capital Markets:

Overall, the fact the unrounded core-CPI was just +0.358% and supercore slowed to just +0.5% leaves a June cut as the market’s operating assumption.

— Giuseppe Sette at Toggle AI:

This is a “stable inflation” report. With strong employment and CPI not budging from the 3% handle, the Fed will not be in a rush to cut.

— Jeff Roach at LPL Financial:

Outside of shelter and gas prices, inflation would be benign. The long-term disinflation trajectory has probably not changed but the path to the Fed’s 2% target will be choppy. Expect to see markets struggle with what this means for Fed policy. As of now, markets expect the first cut to be in June. Despite the stickiness of inflation, current Fed policy is clearly restrictive.

— Paul Ashworth at Capital Economics:

On balance, we expect the Fed to begin cutting interest rates in June, by which time there will be more evidence of core PCE inflation moving close to the 2% target. But that will now require a shift in tone in the March CPI data.

— Larry Tentarelli at Blue Chip Daily Trend Report:

Unless inflation starts to drop and come in below forecast, most notably CPI and Core PCE, then we expect the Fed to take a patient and measured approach to any potential rate cuts. If there is any notable weakness in the jobs market, that would increase the chance of a Fed rate cut by June.

— Torsten Slok at Apollo Global Management:

Inflation has started to move sideways and remains well above the Fed’s 2% inflation target. This means the Fed will keep rates higher for longer.

The Fed is widely expected to hold interest rates steady for a fifth straight meeting when policymakers gather March 19-20. Much of the focus by investors will be on the Federal Open Market Committee’s quarterly forecasts for rates, including whether fresh employment and inflation figures have prompted any changes.

Corporate Highlights:

— Oracle Corp. reported a spike in bookings in its cloud computing business, showing progress in its bid to capture more of the competitive market.

— Kohl’s Corp. reported same-store sales in the fourth quarter that missed the average analyst estimate, suggesting the department store chain struggled to attract shoppers during the crucial holiday shopping season.

— 3M Co. named aerospace veteran William Brown its new chief executive officer, ending a turbulent run of nearly six years for Mike Roman marked by a declining stock and growing concerns over legal liabilities related to so-called forever chemicals.

— Deutsche Bank AG Chief Executive Officer Christian Sewing vowed to meet previous cost targets, saying he’s working on additional measures.

— Southwest Airlines Co. plans to cut flying capacity for the full year, halt most hiring and rework schedules after Boeing Co. slashed expected 737 Max deliveries as the planemaker faces regulatory and criminal investigations over safety issues.

— Archer-Daniels-Midland Co. revised its intersegment sales for the last three years following an internal probe into its financial reporting and disclosed a $137 million impairment charge related to its animal nutrition unit. The shares rose in early trading.

— Scholastic Corp., the biggest publisher and distributor of children’s books, has agreed to acquire 9 Story Media Group, as it looks for ways to broaden the audience for its library of children’s stories.

Key events this week:

— Eurozone industrial production, Wednesday

— ECB Governing Council member Yannis Stournaras speaks, Wednesday

— Volkswagen, Adidas earnings, Wednesday

— US PPI, retail sales, initial jobless claims, business inventories, Thursday

— China property prices, Friday

— Japan’s largest union federation announces results of annual wage negotiations, just ahead of Bank of Japan policy meeting, Friday

— Bank of England issues inflation survey, Friday

— US industrial production, University of Michigan consumer sentiment, Empire Manufacturing, Friday

Some of the main moves in markets:

Stocks

— The S&P 500 was little changed as of 9:50 a.m. New York time

— The Nasdaq 100 was little changed

— The Dow Jones Industrial Average was little changed

— The Stoxx Europe 600 rose 0.3%

— The MSCI World index was little changed

Currencies

— The Bloomberg Dollar Spot Index rose 0.2%

— The euro fell 0.1% to $1.0910

— The British pound fell 0.4% to $1.2757

— The Japanese yen fell 0.5% to 147.74 per dollar

Cryptocurrencies

— Bitcoin was little changed at $72,061.7

— Ether fell 0.5% to $4,014.46

Bonds

— The yield on 10-year Treasuries advanced four basis points to 4.14%

— Germany’s 10-year yield advanced two basis points to 2.32%

— Britain’s 10-year yield declined three basis points to 3.94%

Commodities

— West Texas Intermediate crude was little changed

— Spot gold fell 0.9% to $2,162.25 an ounce