NEW YORK (Reuters) – U.S. consumer prices rose solidly in January, leading to the biggest annual increase in inflation in 40 years, which could fuel financial markets speculation for a 50 basis points interest rate hike from the Federal Reserve next month.
The consumer price index gained 0.6% last month after increasing 0.6% in December, the Labor Department said on Thursday. In the 12 months through January, the CPI jumped 7.5%, the biggest year-on-year increase since February 1982.
That followed a 7.0% advance in December and marked the fourth straight month of annual increases in excess of 6%. Economists polled by Reuters had forecast the CPI rising 0.5% and accelerating 7.3% on a year-on-year basis.
STOCKS: S&P e-mini futures extended losses were down 1.05%, pointing to a weak open on Wall Street
BONDS: Yields on benchmark 10-year notes rose to 1.9979%. Two-year Treasury yields rose to 1.4605%
FOREX: The dollar index turned 0.29% higher
TOM PORCELLI, CHIEF US ECONOMIST, RBC CAPITAL MARKETS, NEW YORK
“Interestingly enough, and just something to note, they just changed the weighting, the CPI did, of goods. Goods now have more of a weighting, which again makes sense, because it’s based on what spending happened last year. So the weight of goods prices are now very elevated relative to what we saw prior. So if I’m right that you’re going to have this transition from goods to services spending, and there’s a bigger weight now for goods, what’s going to happen to goods prices? It probably falls even more than what I originally thought. That’s a long way of saying I think you get some acceleration in the immediate term, but I do think by the end of the year we’ll be in a very different place from an inflation perspective, a better place. So much of it is contingent on that idea, you need this transition to take place between goods and services.”
“We all expected an acceleration here…is 7.5% to 7.3% the difference between a 25 and a 50 (basis point hike)? No. I sincerely hope that the Fed’s reaction function is not that sensitive to this kind of miss. Because the reality is we’ve had firm inflation now for months. This is the number that’s going to push them over the edge? I don’t think that they’re supposed to go 50 basis points. I think they are supposed to go 25 basis points and I think they are supposed to have a lot of patience between now and the balance of the year.”
JAMIE COX, MANAGING PARTNER, HARRIS FINANCIAL GROUP, RICHMOND, VIRGINIA
“All eyes are on the Fed in March. Markets are starting to price in a 50 basis point hike as opposed to a gradual increase in the Fed funds rate starting in March.”
“Markets are definitely taking this data under consideration as a likelihood to increase that probability. At this point, everyone knew that the inflation data was going to be hot. That’s not a surprise. But the clues that everybody’s looking for is whether or not the data is hot enough to induce the Fed to raise rates quicker.”
“I think that they’re (Fed) more likely to work off the balance sheet at a higher rate, sort of spin down. I don’t think they’re going to go fast on the Fed funds rate. They would preferentially choose to hike every meeting as opposed to doing larger fed fund rate increases.”
“Markets are going to continue to transition from growth to value and that rotation is going to be in play in earnest here for a while. The rotation that started in fits and starts last year is now going to be more of a permanent condition.”
JAI MALHI, GLOBAL MARKET STRATEGIST, JPMORGAN ASSET MANAGEMENT
“US inflation has consistently beaten expectations and today’s inflation release saw more of the same. This provides a significant challenge for the Fed as it aims to keep price increases under control while at the same time sustaining the economic expansion.
“High energy prices and supply issues are stoking inflation but these issues should eventually fade. Of greater concern is that wage pressures are building and the central bank will not want to risk a wage price spiral. Looking ahead though, real consumer spending on discretionary goods and services is likely to cool naturally, as higher energy costs begin to bite.
“The bond market is currently suggesting that there is a good chance the Fed will hike rates more than 5 times by the end of the year. While today’s release will be uncomfortable reading for the Fed, the squeeze on real incomes suggests they can perhaps afford to be a little more patient than the market thinks.”
BRIAN BATTLE, DIRECTOR OF TRADING, PERFORMANCE TRUST CAPITAL PARTNERS, CHICAGO
“These are the biggest numbers in decades. However economic statistics have no value right now because of the statistical noise due to the lockdowns … The statistics are full off exceptions.”
“The numbers came in about as expected. So it’ll affect the market two ways. One, the Federal Reserve is going to raise rates. These numbers support their case for quantitative easing and to raise rates, so those two things are still on the table.”
“So what matters to us out here in the field is how much are they going to raise rates? At what speed we can’t tell right now, but we know that their intentions will not be thwarted by these numbers.”
KATHY LIEN, MANAGING DIRECTOR, BK ASSET MANAGEMENT, NEW YORK
“Ultimately, this is a very dollar-positive number. It sent the dollar up pretty much across the board, particularly against the Japanese yen. Fifty basis points is going to be back on the table for March. I still think they’re going to go with 25, but you can see from the fed fund futures that 50 bps odds have jumped to about 45%.
“The market is shifting its positioning, it’s something that investors can’t ignore. We had a very quiet week for the most part, with the euro-dollar and dollar-yen, this is the number we’ve been waiting for. The confirmation that we’ve got hot inflation means that it’s all-go on monetary tightening.”
BRIAN JACOBSEN, SENIOR INVESTMENT STRATEGIST, ALLSPRING GLOBAL INVESTMENTS, MENOMONEE FALLS, WISCONSIN
“With good jobless claims and hotter than expected inflation, the hawks are having a field day at the Fed. I’m not expecting monthly inflation relief until March. The Fed will likely accelerate its balance sheet runoff to May instead of risking a 50 bps hike. They have a couple levers to pull to remove accommodation. The optics around a faster or sooner balance sheet runoff are probably better than a bigger than typical hike.”
PAUL NOLTE, PORTFOLIO MANAGER, KINGSVIEW INVESTMENT MANAGEMENT, CHICAGO
“Where we’re seeing it really play out is in the bond market. So we’re seeing the spread between the 2/10s come in a little bit more. We’re getting down to the 50 level, which for us is kind of the trigger point for a countdown to a recession. It is another data point that points to the fact the Fed will be in the market raising rates, and at some point during that rate hiking cycle you’ll likely see something break in the economy. That’s what we’ve seen historically from the Fed.”
SUBADRA RAJAPPA, HEAD OF US RATES STRATEGY, SOCIETE GENERALE, NEW YORK
“This number re-emphasizes the sense of urgency for the Fed to act.”
“The market is starting to price in a much more aggressive path of rate hikes and this really starts to increase the odds of perhaps a 50-basis points rate hike at one of the meetings, but broadly speaking we’re pretty much fully priced in for a hike per meeting between now and July.”
JOE SALUZZI, CO-MANAGER, TRADING, THEMIS TRADING, NEW JERSEY
“That’s more than expected. So now the market is going to be worrying – are we getting a 50 basis point hike instead of a 25? And the whole story of how many we’re going to get, how often it’s going to be and what’s the pace of rate hikes.”
“The reason we don’t know is if it’s supply or demand driven still. Part of it is supply driven. And if that kind of works itself out, then it’s more of a temporary thing and it will come down.”
“The hawkishness is built into the market at this point. It’s in there. So that’s why I’m kind of surprised that they sold off as much as they did. I wouldn’t be surprised if we see a bounce back rally come mid-day today in the stock market.”
ART HOGAN, CHIEF MARKET STRATEGIST, NATIONAL SECURITIES, NEW YORK
“The data obviously came in a bit hotter-than-expected but people were expecting a hot number to begin with, so it was pretty well priced into the market because everyone has been talking about inflation.”
“So at this one point in time, it doesn’t sway the market in terms of what the Fed is going to do in March.”
“We also have to look at the way the market was set up before the data, three in the last four days were positive and you are coming from a place where everyone put inflation worries in the back burner for a bit and focused more on better corporate earnings.”
“Markets have been very constructive leading up to this news, especially with the Nasdaq retracing about half its losses from January lows, so we are certainly at a place where the reaction function has a downside to it.”
PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK
“CPI came in a bit on the high side, and it doesn’t suggest inflation is peaking anytime soon. It might mean the Fed could get more aggressive. The jury is still out whether we’ll have a 25-basis-point or 50-basis-point rate hike in March.”
“Obviously, this means (10-year Treasury yields) will test the 2% pretty quickly, and the dollar is strengthening.”
“I would say inflation will peak in the beginning of the fourth quarter. There are still bottlenecks out there. The real test is wages. Last week’s employment data suggests salaries are taking off. That’s structural.”
“We’ll see in February employment data to see if there’s another increase in wages. That could the key point as to whether the Fed gets more aggressive.”
(Compliled by the global Finance & Markets Breaking News team)