On Tuesday, stocks registered their worst day in months after January’s Consumer Price Index (CPI) indicated persistently high inflation. The headline annual CPI slowed less than was anticipated, and the core inflation (which excludes food and energy prices) remained unchanged, countering the expectations for a decline.
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The stickiness of the price increases continued to reside mainly within the shelter category, as housing accounted for over half of January’s inflation. Moreover, while most CPI components showed declines, shelter/rent clocked in its largest increase in 11 months. Stripping out the shelter prices, inflation is already below the Federal Reserve’s 2% target.
Rate Cuts Postponed
January’s hot inflation numbers showed that the path toward inflation normalization remains choppy and lengthy. Economic growth may be too robust for the Fed to achieve “the last mile” of disinflation, requiring it to keep rates higher for longer. Tuesday’s inflation print again postponed the central bank’s first rate cut, with traders pushing their bets from May to June.
After the inflation-induced slump, Wednesday’s trading resulted in a strong rebound, helped by Chicago Fed President Goolsbee’s comments that investors shouldn’t focus too much on a single-month data point. He also emphasized that the Fed’s 2% target is based on the personal consumption expenditures (PCE) index, which may differ from the CPI numbers. The preliminary PCE data is scheduled to be published on February 28.
Tech Stocks Remain Strong
Stocks were further supported on Wednesday as dip buyers rushed to snap up technology stocks. One of the largest gainers was Nvidia (NVDA), which topped Alphabet’s (GOOGL) market capitalization, becoming the third most valuable U.S. company. Investors increased their positions in the AI chipmaker’s stock in anticipation of next week’s release of its quarterly results.
Looking ahead, investors will continue focusing on upcoming economic indicators and Fed members’ comments. Market sentiment and stock trajectory depend on growth and inflation prints, affecting the expectations regarding the rate-cut timeline.
