- Inflation data came in hotter than expected in February, with headline CPI meeting expectations at 0.4% monthly gain and core CPI higher than expected at 0.4% monthly and 3.8% annually.
- Despite hotter inflation, stocks rose to new highs as investors remained optimistic on economic outlook and prospects for eventual Fed rate cut. Markets still expect Fed to begin cutting rates in June.
- Energy and food inflation ticked up in February, though shelter inflation rose at slower pace. Analysts said more high inflation reports could push first Fed rate cut beyond mid-year, jeopardizing hoped-for “soft landing.”
The stock market notched gains on Tuesday as key inflation data came in hotter than expected, helping set expectations for the timing of a Federal Reserve interest rate cut. Stocks rose to new highs as investors seemed to take the inflation report in stride.
Market Reaction
The S&P 500 rose about 1.2% to close at a new record high, while the tech-heavy Nasdaq Composite climbed roughly 1.5% after two days of losses. Chip giant Nvidia’s 7% gain helped lift tech stocks. The Dow Jones Industrial Average ticked up about 0.6%.
Treasury yields also gained, with the 10-year yield rising 5 basis points to trade around 4.15%. Gold prices fell more than 1% to trade near $2,162.
Drivers Of Inflation
The Consumer Price Index release is seen as influential given Fed policymakers have said they want inflation to ease before cutting rates. Headline inflation met expectations with a 0.4% monthly gain, while core CPI came in higher than expected at 0.4% on the month and 3.8% on the year.
Energy prices jumped in February, buoyed by gas prices, after falling for several months. Shelter inflation remained elevated as rent and owners’ equivalent rent rose, though at a slower pace than January. Food inflation ticked up, led by food away from home.
Fed Policy Outlook
Markets still expect the Fed to begin cutting rates at its June meeting, pricing in a 60% chance of a cut. That’s despite hotter inflation data that dented optimism the Fed could cut sooner.
Markets began the year betting on earlier rate cuts, but have pushed expectations later following cautious Fed commentary. Fed Chair Jerome Powell said last week the FOMC wants to see more data before committing to cuts.
Analysts said February’s report likely keeps June cut expectations stable, but higher inflation next month could push the first cut beyond mid-year. That could put the Fed’s hoped-for “soft landing” in jeopardy.
Corporate News
Oracle shares jumped about 12% on signs of progress in cloud computing amid a partnership with AI chip giant Nvidia. Boeing shares sank as safety woes persist and airlines expect more delivery delays.
Conclusion
Markets shrugged off hotter inflation as investors remain optimistic on the economic outlook and prospects for an eventual Fed rate cut. Key will be whether price pressures continue to ease. More high inflation could force the Fed to stick with rate hikes longer, posing a risk to the economy and markets.
