U.S. consumer prices rose more than expected in January, according to the latest data from the Bureau of Labor Statistics released Tuesday morning.
Investors were closely watching the numbers for clues as to when the Federal Reserve would begin cutting interest rates. Markets are now pricing in a nearly 80% chance that the Fed will cut rates in June, contrary to earlier expectations that the central bank would begin cutting rates in May.
“This is a bad report for those betting that the Fed will soon start lowering interest rates,” wrote Eugenio Aleman, chief economist at Raymond James, in reaction to the hotter-than-expected report.
Ellen Zentner, chief U.S. economist at Morgan Stanley, added: “The acceleration in core PCE is consistent with our view of a rocky road ahead. We believe the sequential numbers in the first quarter of 2024 will be higher overall than what we saw in the first quarter of 2024.”
Citi, meanwhile, warned that high inflation figures would likely impact the recent stock market rally.
“A strong core CPI will not be a game-changer but will likely lead to a near-term pullback,” wrote Stuart Kaiser, head of U.S. equity trading strategy at Citi. “With strong growth data as a backdrop, it will be difficult for the Fed to cut interest rates as soon as some investors had hoped and make the market fear an overheating type scenario despite very restrictive policy. “
“We should see a pullback here, perhaps in the order of 2 to 4 percent, but that is somewhat limited by the fact that the economy is still quite strong,” he continued.
Stocks fell in early trading after the report was released, while the yield on the 10-year Treasury note (^TNX) rose about 10 basis points to trade near 4.3%.