Volatility in the Stock Market: A Response to the Latest CPI Report

By: Miguel A. Rodriguez

09:51, 15 February 2023


January CPI up 0.5% MoM, revised from 0.1% increase in Dec, with a slower rate of decline YoY at 6.4%. Meanwhile, gold prices continue to decline, approaching support at $1830. 

The Consumer Price Index for January increased by 0.5% from the previous month, which was revised from a 0.1% increase in December. Nevertheless, the rate of decline in the data has slowed down and increased by 6.4%, which is slightly higher than anticipated. 

The Core Consumer Price Index, which excludes food and fuel prices, increased by 0.4% for the month as predicted, and by 5.6% for the year, which was slightly higher than expected. 

Analysts were expecting the figures to offer more conclusive evidence that the successive interest rate hikes in the previous year would exert a stronger downward pressure on inflation. 

Growth stocks have been experiencing a rally this year, fueled by the expectation that the Fed may soon pause its rate hikes. 

Related: Dow Jones analysis and price predictions 

However, hopes for a rapid resolution are currently diminishing. Some sections of the market now anticipate an additional quarter-point increase when the Federal Reserve meets in March, followed by at least one more increase in May, which could cause the benchmark rate to surpass 5% when the Federal Reserve eventually decides to pause its rate hikes. 

Generally speaking, the difference from what was previously expected is minimal. The recently published CPI figure can be regarded as neutral and, in any case, displays a year-on-year decline, albeit less than on previous occasions. 

As per Jerome Powell's forecast, inflation is still decreasing, but the rate of decline is expected to taper off in the upcoming months. 

Currently, investors are directing their attention towards the Personal Consumption Expenditure figure, which is scheduled to be released at the end of next week. This particular figure holds more significance for the Federal Reserve in assessing the progress of inflation, as compared to the CPI, thus it is expected to have a more direct impact on the performance of financial assets. 

Related: How to Fight Inflation – 5 Inflation-Proof Assets 

The stock indices experienced a day of volatility yesterday, primarily due to the ambiguous nature of the published data. Despite a decline in inflation, it was less than what was anticipated, resulting in uncertainty among investors.  

The Treasury bond yields rebounded, with the 10-year bonds reaching a level of 3.79%. This also put an end to the weakening of the dollar that was prevalent in the market during the morning. 

Meanwhile, gold prices continued to decline from the beginning of the month and are now nearing a first level of support around the $1830 mark. 

Gold price chart

Sources: Bloomberg, Reuters 

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