Price Index Data Sway Potential Rate Cuts

CPI Data Comes in Lower Than Expected Pushing Off Rate Cuts Further

January's Consumer Price Index data fell short of market hopes, suggesting that inflation hasn't dropped enough for the Federal Reserve to consider reducing interest rates anytime soon.

Core inflation, which the Federal Reserve follows closely, rose 3.9% year-on-year in January, above the expected 3.7% and repeating the figure for December. The data indicates that inflation is slowing down at a reduced pace, suggesting it may take more time than anticipated to achieve the 2% target.

The implied odd of rate cuts this year plummeted after yesterday's US CPI report. There are now just 94 basis points in rate cuts priced in for the calendar year compared to 111 bps, before the data release. 

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What the Future Holds for Interest Rates

The chance of an interest rate cut in May has dropped to 40% from over 70% before the data was released. However, there's still a possibility of a rate cut at the June 12 meeting, though it might be just 25 basis points.

The market outlook has shifted dramatically recently. This change comes after the Non-Farm Payroll numbers came in much higher than anticipated, coupled with yesterday's CPI data, which effectively eliminates any chance of an interest rate cut happening soon.

The CPI data was a splash of cold water for Wall Street as it confirmed that inflation is far from receding, remaining at high levels.

Stocks and Indices Cool Off After All-Time Highs as Expected

Stocks moved away from their historical highs, and North American Indices experienced losses of more than 1%, a downward correction that numerous market analysts expected. However, none of them anticipated it would be triggered by high inflation data but rather by reasons related to technical analysis.

Treasuries Heat Up as the 2-Year Yields Hit a 2024 High

Treasuries sold off across the curve, and two-year yields hit their highest level since before the Federal Reserve's “pivot” in December.

The shock was also transferred to the volatility market. The Volatility Index (VIX), also referred as the fear index, shot up due to fear that this change in the interest rate scenario will cause more pronounced falls in the stock market. VIX futures surpassed the 15 zone, the highest levels in the last 3 months.