Authors: Susan McGee and Saqib Iqbal Ahmed
(Reuters) - A relatively dovish reading of rising U.S. consumer prices sparked a sharp rally in stocks and bonds on Wednesday, but traders and investors warned the market may remain anxious about the pace of inflation.
Market participants said the path ahead remains shaped by continued uncertainty over the prospect of further interest rate cuts from the Federal Reserve and incoming President Donald Trump's actions on issues such as taxes and tariffs.
“The issues that drove rates higher and weighed on stocks remain,” said Art Hogan, market strategist at B. Riley Wealth. “We just don’t know if we’re going to see surgical or sweeping tariffs. , and what kind of policy moves we might see in other areas that might push up inflation or economic growth.”
Although consumer prices rose faster than expected in December, markets remained focused on the core Consumer Price Index (CPI), which excludes volatile food and energy components. The core consumer price index (CPI) rose 0.2% in December, following a four-month rise of 0.3%.
Stocks surged after the CPI report, with the benchmark S&P 500 index rising 1.8%.
The benchmark 10-year Treasury note reversed losses from Friday's strong job creation report, pushing the yield down to 4.66%. When bond prices rise, yields fall.
"The data was slightly better than expected, but traders will jump on any good news," said Steve Sosnick, market strategist at Interactive Brokers. "This is one we have to The numbers and reaction are viewed positively, although it is likely amplified by the negativity we have been battling."
Yields have climbed sharply in recent weeks after the Federal Reserve eased the prospect of cutting interest rates in December and projected stronger inflation in 2025 than before.
Jeff Weniger, head of equity strategy at WisdomTree Inc., an asset manager in New York, said there were "rumors that we might actually raise interest rates" ahead of the CPI report.
But concerns about the potential impact Trump's policies could have on inflation remain concerning. Federal Reserve officials noted on Wednesday that uncertainty will intensify in the coming months as they await the first signs of policy from the incoming administration, even as they said Wednesday's data showed inflation was continuing to slow.
After the CPI report, Rick Reed, chief investment officer of global fixed income at BlackRock, said progress on inflation "is likely to be slow and uneven, especially as the economy faces significant uncertainty due to changes in fiscal policy next year." .
For example, changes in tariffs and trade regimes "do have the potential to temporarily increase core goods inflation," Reid said in emailed comments.
As markets remain data-dependent, volatility is likely to become more common. Kevin Flanagan, head of fixed income strategy at WisdomTree, predicts that daily swings of 10 to 15 basis points in the 10-year Treasury note may become the new normal.
After the data was released, interest rate futures traders still expected the Fed to wait until June to implement its next rate cut. But now they are pricing in the possibility of a second rate cut by the central bank before the end of the year. Ahead of the report, markets were pricing in bets on just one rate cut in 2025.
Tina Adatia, head of fixed income client portfolio management at Goldman Sachs Asset Management, said in a note to clients that consumer price index data strengthened the case for further rate cuts, but "the Fed is patient enough." ".
"The Fed needs more good inflation data to implement further easing," Adatiya said.
(Reporting by Susan McGee and Saqib Iqbal Ahmed; Editing by Lewis Krauskopf and Chizu Noyama)