Inflation Heats Up, Stocks Tumble

Consumer prices rose more than expected in January, sending Treasury yields higher and stock futures lower on Wednesday morning.


In January, consumer prices rose 0.5% over the prior month and 0.3% over last month on a “core” basis, which excludes the more volatile costs of food and gas, according to the latest numbers from the Bureau of Labor Statistics. Wall Street was looking for a 0.3% and 0.2% increase in these figures, respectively.

Compared to last year, the core consumer price index (CPI) was up 1.8%, more than the 1.7% increase that was expected by economists.

Markets on Wednesday were taking this as a sign that inflation pressures may indeed be perking up in the economy, re-kindling market worries that surfaced earlier this month about an overheating economy. Fears over inflation pressures, and in turn more aggressive interest rate hikes from the Federal Reserve, was seen as the initial impetus for the stock market sell-off that roiled markets last week.

Following Wednesday’s inflation data, stock futures were sharply lower with Dow futures down as many as 330 points, or 1.3%, with S&P 500 and Nasdaq futures also down more than 1.2%.

Treasury yields were also higher, with the 10-year hitting 2.87% and the 2-year hitting 2.14% as bond markets anticipate potentially more aggressive action on interest rate hikes from the Federal Reserve this year. As of December, the Fed expected it will raise interest rates three times this year.

Including all items, CPI rose 2.1% over the prior year in January, more than the 1.9% that was expected by economists. Markets more closely track the “core” numbers as the Federal Reserve prefers to strip out the more volatile costs of food and gas.

Torsten Sløk, chief international economist at Deutsche Bank, noted in an email on Tuesday that economists surveyed by Bloomberg expect core inflation to average 1.8% in the second quarter of the year, up from 1.5% in the first quarter. Wednesday’s report will likely pull forward expectations for faster inflation even more.

“I currently spend significant amounts of time on the phone, emails, and in meetings explaining this coming jump in the March and April inflation data,” Sløk said. “And I have come to the conclusion that this is not priced in to rates at all.”

Wednesday’s post-report reaction shows the market re-pricing these expectations. Quickly.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: