Strong Inflation but Weak Sales Will Keep Fed on Rate Hike Path

Bond yields rose and stocks slumped after an unexpected rise in consumer inflation to its fastest pace in a year, making it more likely the Fed will raise interest rates three or more times this year.

At the same time, January retail sales fell unexpectedly in their biggest drop since last February, declining 0.3 percent, raising new concerns about the economy. That is likely to prompt lower expectations for first quarter GDP growth.

“You have to worry about more inflation, worry more about the Fed,” said Michael Schumacher, director of rate strategy at Wells Fargo. He said the fed funds futures market reflects a slightly higher expectation for interest rates — with just over 2.6 hikes now factored in, after the consumer price index data, from 2.5 prior to the report.

The CPI rose 0.5 percent, or 2.1 percent year over year, higher than the 0.3 percent increase expected. The core CPI, excluding food and energy, rose 0.3 percent, compared with the expected 0.2 percent increase. That puts core inflation at a pace of 1.8 percent year over year.

Stock futures erased sharp gains and plunged, with the Dow opening down triple digits, after the 8:30 a.m. ET data. The 2-year Treasury yield, which reflects Fed policy, jumped to 2.15 percent, while the 10-year rose to 2.88 percent.

“This is muscular. The CPI is just very solid and the fact that the year over year is stable is impressive. Given … the comparisons of last year, … this is a pretty compelling inflation reading,” said Ward McCarthy, chief financial economist at Jefferies.

via CNBC

Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.