Key Details on Latest CPI Report Send Yields and Stocks on Rollercoaster
The latest US consumer price index (CPI) report for December came in hotter than expected this morning, sending markets on a volatile ride. The CPI rose 0.5% for the month, higher than the 0.4% estimate, and posted a year-over-year increase of 6.5%. This evidence that inflationary pressures continue to persist led to a spike in Treasury yields and early losses on Wall Street. However, stocks battled back through the day to finish mixed as investors weighed the outlook for Federal Reserve policy.
As soon as the inflation report hit at 8:30AM ET, yields on the benchmark 10-year Treasury note jumped 6 basis points to 3.56% while 2-year yields, more sensitive to rate expectations, surged over 10 basis points. This initial reaction indicates traders see more aggressive Fed tightening on the horizon to combat stubborn inflation.
Early market reaction sent stocks tumbling at the open, with the Dow Jones Industrial Average falling 120 points in the first 30 minutes. However, dip buyers emerged to lift equities off their lows through late morning and a sharp rally in tech shares buoyed the Nasdaq to a 0.7% gain around midday.
The major indexes oscillated between slight gains and losses for the remainder of the session before a late slide left the S&P 500 down 0.3%, the Dow 14 points lower, and the Nasdaq clinging to a 0.1% advance into the close.
Fed Rate Forecast Shifts Amid Mounting Recession Worries
Heading into the critical inflation report, fed funds futures priced in a terminal rate peaking at 4.75% to 5% by mid-2023. However, today’s hotter than expected reading has traders now expecting a peak around 5.15%. At the same time, anticipation continues to build around a potential economic recession.
The combination of higher rates, still stubborn inflation, and looming downturn has markets choppy and uncertain. Pimco’s investment strategist, Erin Browne, summed up the confusing landscape stating “It’s very difficult in this environment to have a lot of conviction one way or another“.
While analysts debate whether current conditions set up a soft landing or hard one, Credit Suisse equity strategist Jonathan Golub made the case for caution:
“Even if we have a mild recession, we expect to see EPS growth actually contract in 2023 and our indicator suggests returns next year will be virtually nothing — about 1%.”
This outlook of flattish returns and heightening uncertainty around the Fed’s ability to orchestrate a soft landing explains much of today’s mixed trading.
Where Do Markets Go from Here? Eyes on Earnings and Fed Speakers
With the CPI reaction now digested, attention will turn to the start of Q4 earnings season tomorrow and especially results from major banks like JPMorgan Chase, Citigroup and Wells Fargo. Guidance and commentary around the economic outlook from management teams will shape sentiment next week.
Additionally, a chorus of Fed speakers throughout the coming week could impact the rate hike narrative if any material shifts in tone emerge. After driving markets all year, the interplay between inflation data, Fed policy and recession fears show no signs of letting up in early 2023.
S&P 500 Sector Performance – January 12, 2023
| Sector | Gain/Loss | % Change |
|---|---|---|
| Consumer Discretionary | -24.01 | -0.84% |
| Communication Services | +9.05 | +0.35% |
| Technology | +11.10 | +0.18% |
| Financials | -3.65 | -0.14% |
Though trading was ragged, areas like tech and communication services related to long duration assets found support from falling yields through the day. Meanwhile cyclicals lagged, with consumer discretionary joining financials as leading decliners. This indicates recession wariness is showing up beneath the surface even on a mixed day for indexes.
Daily Treasury Yield Curve Change
| Tenor | Yield | Change (bps) |
|---|---|---|
| 1 Month | 4.07% | +1.2 |
| 3 Month | 4.20% | +3.5 |
| 6 Month | 4.26% | +5.3 |
| 1 Year | 4.31% | +6.1 |
| 2 Year (Most sensitive to Fed policy) | 4.13% | +10.2 |
| 10 Year (Benchmark) | 3.56% | +6.0 |
| 30 Year | 3.68% | +2.3 |
Longer dated yields rose much less than shorter maturity ones, flattening the curve. This could reflect building recession worries longer term while traders feel the Fed still has to go harder on rate hikes nearer term after the hot inflation data.
Flattening yield curves are seen as ominous recession indicators by some strategists if they invert (short rates above long ones), though opinions vary on the signaling effect.
Bitcoin and Other Cryptocurrencies Join the Rollercoaster
Like stocks and bonds, cryptocurrencies went for a volatile ride after the inflation numbers crossed. Bitcoin plunged below $17,000 initially only to recover back above $18,000 by midday as risk appetites improved. By the close, Bitcoin had settled near $17,500 for a 3% drop on the day.
Other major digital tokens like Ethereum trended similarly while more speculative altcoins amplified the swings with double digit intraday volatility.
Just as divisive debates rage in the equity and bond markets this year, crypto experts continue to feud about the macro forces driving cryptocurrency prices and forecasts for 2023. December’s consumer inflation reading ensured more uncertainty and debate lie ahead.
To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.
