US shares shrug off scorching inflation numbers

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US inflation is starting to bite again. But stocks mostly shrugged.

What you need to know today

  • The US CPI rose 0.5% in January, ahead of the 0.4% forecast by economists. Year-over-year, prices rose 6.4% versus 6.2% expected. Egg prices were still sky high.
  • US stocks closed mixed on Tuesday. The Dow Jones Industrial Average and the S&P 500 fell while the Nasdaq Composite rose. After a positive day of trading, Asia Pacific equities mostly closed lower with only China’s Shanghai Composite and Shenzhen Component staying in the green.
  • US Treasury yields rose after a hotter-than-expected inflation report. In particular, 6-month Treasuries surged to close at 5.022%, the highest yield since July 2007.
  • PROFESSIONAL US Treasury yields are rising again. The 10-year Treasury yield hit a five-week high this week, while the 2-year Treasury yield rose 0.41 percentage point in February alone. This is how professionals would play the market.

The final result

The hotter than expected January CPI report cast a shadow over US markets yesterday.

Prices in the US rose faster than economists had expected last month; They have been inflated by higher food, energy and housing costs. But even core CPI — which excludes more volatile food and energy prices — posted a 0.4% monthly increase and a 5.6% year-on-year increase. Both beat the respective estimates of 0.3% and 5.5%.

Is the process of disinflation – in the words of Federal Reserve Chair Jerome Powell – still going on in the US? January’s core CPI of 5.6% is a tiny notch below December’s reading of 5.7%, meaning prices are still declining. But just barely.

The US markets reacted accordingly. Treasury yields rose, suggesting investors are pricing in higher rate hikes from the Fed. stocks fell. The Dow slipped 0.46% and the S&P slipped 0.03%. However, the Nasdaq, traditionally the most interest-rate sensitive index, closed 0.57% higher, supported by a 7.51% gain in Tesla and a 5.43% rise in Nvidia.

Although stocks fell mostly, they have been remarkably resilient. A team at JPMorgan had forecast that the S&P would fall between 0.75% and 1.5% should annual CPI come in at 6.4%. The actual drop in the index: just 0.03%.

The strange disconnect between bond markets and stock markets persists. Investors could be optimistic that even as prices rise, consumer spending will remain strong – as Coca-Cola’s earnings report suggested – keeping the economy growing. As for that theory, Wednesday’s US retail sales report will put it to the test.

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