(Bloomberg) — Stocks got hit and bond yields soared as traders pushed out bets on the next Federal Reserve rate cut to December amid strong inflation.
Every major group in the S&P 500 fell, with the benchmark down about 1%. Treasuries tumbled, with benchmark 10-year yields climbing 10 basis points to 4.63%. A selloff in major exchange-traded funds tracking both asset classes showed the market was poised for its worst cross-asset reaction to the consumer price index in about a year. The dollar climbed.
Follow The Big Take daily podcast wherever you listen.
Underlying US inflation last month rose by the most since March, diminishing chances the Fed will lower interest rates anytime soon. The so-called core CPI — which excludes food and energy costs — increased 0.4% in January after a 0.2% advance in December. The advance was broad, including higher prices for prescription drugs, car insurance and airfares.
“Investors were looking for reassurance in this morning’s inflation report — and they didn’t get it,” said Bret Kenwell at eToro. “The immediate reaction to today’s report will likely weigh on stocks in the short term, as a higher-than-expected print further lowers the odds of rate cuts from the Fed this year and stokes investors’ reflationary fears.”
The S&P 500 fell 0.9%. The Nasdaq 100 fell 1%. The Dow Jones Industrial Average fell 0.8%.
The yield on 10-year Treasuries advanced 10 basis points to 4.63%. The Bloomberg Dollar Spot Index rose 0.3%.
This morning’s higher than expected CPI number (following the higher inflation component of last week’s Employment Report along with the concerns over tariffs) have taken the yield on the 10-year note back above its trend-line from last September.
If we see any further upside movement as we move through February, it will indeed give us confirmation that long-term yields are going to stay “high for longer” going forward.
This does not mean that they will push above 5% level soon…nor that these yields will not reverse lower at some point later this year. However, it should raise concerns that the Fed will wait quite a bit longer to cut short-term rates than the Street had been thinking until recently…and also raise concerns that Secretary Bessent’s goal of lower long-term yields will take longer to achieve as well.
January was hot, hot, hot — for inflation: Looking at the month-over-month, or year-over-year figures on both the headline and core rates of inflation, the Consumer Price Index came in hotter than expected. This marks backtracking for the journey toward lower prices and price stability.”
There’s more inflation and employment data to digest before the next scheduled announcement from the Fed on March 19. It is hard to make the case for a rate cut at this point.
For now, it’s a “wait and see” approach for Fed chair Jay Powell and his colleagues, who recognize that the case for further easing in the near term has been reduced. Rate hikes don’t appear to be on the table, but a sustained resurgence in inflation could change that.
The “wait and see” Fed is going to be waiting longer than anticipated after a red-hot January CPI inflation report. Prices jumped more than expected and in a broad-based fashion which is consistent with yesterday’s comments from Chair Powell that the Fed is not “in a hurry” to adjust interest rates. This report puts the final nail in the coffin for the rate cut cycle, which we believe is over.
Today’s hotter print shifts investor expectations for monetary policy, which lends to upward pressure on long-term interest rates and downward pressure on equities. Not all equities are impacted equally, however, with more indebted companies facing headwinds from higher rates while others will ultimately benefit from higher revenues as they are able to charge more for their products. We believe value should outperform growth in such an environment.
Today’s data reaffirms Powell’s decision to put rate cuts on the back burner for an extended period of time. Overall, today’s inflation data should force market participants to re-think the Fed’s ability to cut rates this year, especially considering the rise in prices is likely unrelated to any tariff activity from the White House.
Today’s stronger than expected CPI release is likely to further cement the FOMC’s cautious approach to easing. A resilient labor market also provides scope for patience. We think the Fed is likely to remain in ‘wait and see mode’ for the time being and anticipate the Fed staying on hold at next month’s meeting.
All else equal, hotter inflation would likely keep the Fed from cutting rates sooner, which would in turn result in a stronger dollar. The dollar’s strength could help offset some of the inflationary pressures in the economy and from tariffs. It also makes US Treasuries attractive to hold, helping to mitigate some of the upward pressure on yields.
These figures should see the Fed maintain their patient stance, being in no hurry to deliver another rate cut. Consequently, any rate reductions in the first half of 2025 now seem highly unlikely.
With this very strong CPI print, the Federal Reserve is on hold when it comes to interest rates for at least the remainder of 2025. Inflation and inflation expectations are both rising, which is something the Fed needs to counter by keeping rates higher for longer.
The Fed has nothing to do at this point but wait and see, and hope that the economic indicators change to suggest more progress on inflation. If consumer prices or inflation expectations rise any further, it is quite possible that the Fed’s next move is to raise short term interest rates.
The hotter than expected CPI confirms investors’ anxiety regarding too-hot inflation that will keep the Fed on the sidelines (as opposed to cutting rates).
We have been concerned about inflation as a risk for some time, and believe that while risk markets can go higher, it will be a choppier trajectory than the last two years.
Investors should use pullbacks to add to U.S. large-cap equities and the energy, financials, industrials, and communication services sectors.
We would also use moves higher on the 10 year treasury towards 4.5-5% to add to lengthen the duration of portfolios and lock in what we believe to be attractive yields.
Corporate Highlights:
-
Kraft Heinz Co. said it will discount key items in the coming year while improving products and boosting marketing in order to compete for inflation-weary customers.
-
DoorDash Inc., the largest food delivery service in the US, issued an outlook for orders in the first quarter that surpassed Wall Street’s expectations, serving as yet another sign that consumer demand remains resilient.
-
CVS Health Corp. shares climbed the most in more than 25 years after its fourth-quarter results signaled improved performance from the company whose insurance and drugstore units have been struggling.
Key events this week:
-
Eurozone industrial production, Thursday
-
US initial jobless claims, PPI, Thursday
-
Eurozone GDP, Friday
-
US retail sales, industrial production, business inventories, Friday
-
Fed’s Lorie Logan speaks, Friday
Some of the main moves in markets:
Stocks
-
The S&P 500 fell 0.9% as of 9:30 a.m. New York time
-
The Nasdaq 100 fell 1%
-
The Dow Jones Industrial Average fell 0.8%
-
The Stoxx Europe 600 fell 0.1%
-
The MSCI World Index fell 0.7%
Currencies
-
The Bloomberg Dollar Spot Index rose 0.3%
-
The euro fell 0.1% to $1.0346
-
The British pound fell 0.4% to $1.2401
-
The Japanese yen fell 1.1% to 154.18 per dollar
Cryptocurrencies
-
Bitcoin fell 1.8% to $94,606.07
-
Ether fell 2.4% to $2,560.58
Bonds
-
The yield on 10-year Treasuries advanced 10 basis points to 4.63%
-
Germany’s 10-year yield advanced four basis points to 2.47%
-
Britain’s 10-year yield advanced six basis points to 4.57%
Commodities
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Lu Wang, John Viljoen, Sujata Rao, Allegra Catelli and Aya Wagatsuma.
Most Read from Bloomberg Businessweek
©2025 Bloomberg L.P.
