Cooling inflation data drives stocks, bond ETFs higher

Inflation falls

Stock and bond ETFs jumped higher on Wednesday after the U.S. government reported core consumer prices rose less than expected last month.

this SPDR S&P 500 ETF Trust (SPY) surged 1.8%, while iShares 20+ Year Treasury Bond ETF (TLT) The U.S. Bureau of Labor Statistics reported that prices excluding food and energy rose 0.2% from November to December, below economists' expectations of 0.3%, and stock prices rose 1.7%.

Ahead of the CPI release, investors braced for downside volatility. Economic growth has remained strong in recent months, and the Fed warned at its last meeting that inflation was proving stickier than expected.

Traders in turn lowered expectations for a rate cut by the Fed, sending Treasury yields soaring, with 10- and 30-year Treasury yields rising to their highest levels since late 2023 and threatening to break above 5%.

The latest consumer price index data eased some inflation fears, pushing yields down more than 10 basis points.

While investor expectations for the Fed to cut interest rates this year are modest -- probabilities based on pricing in federal funds futures suggest just one rate cut in 2025 -- the latest inflation data reflect some of the Fed's more dire forecasts. Raising interest rates is no longer possible.

Markets are particularly sensitive to inflation, with the incoming Trump administration threatening to impose steep tariffs on U.S. trading partners.

Ahead of the CPI report, the S&P 500 had fallen 5% from its all-time high, while the CBOE Volatility Index, which measures stock market panic, topped 20 for the first time in a month.

Housing price growth slowed in December, offsetting gains in commodity prices, the U.S. Bureau of Labor Statistics said in its Consumer Price Index report.

The overall consumer price index (CPI), which includes prices for all consumer goods and services, rose more than expected from November to December, rising 0.4% against expectations of 0.3%. Rising energy prices are to blame.

However, the Fed tends to favor less volatile core inflation measures, excluding the more volatile food and energy.

In addition, the central bank prefers the personal consumption expenditures (PCE) price index to CPI. Inflation measured by PCE has been lower than CPI. The next PCE report will be released on January 31.