Hot Inflation Lifts Bond Yields, Fed Rate Hike Odds, But Nasdaq, S&P 500 Reverse Higher – Investor's Business Daily

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Core consumer prices, excluding food and energy, rose a faster-than-expected 0.3% in January and 1.8% from a year ago, the Labor Department reported on Wednesday, raising the odds of Federal Reserve interest rate hikes.

X The overall consumer price index rose 0.5% on the month and 2.1% from a year ago, amid higher energy prices.

Food at home prices rose 0.1% on the month as Amazon.com (AMZN) continues to inject even more intensive competition into the grocery business since closing its acquisition of Whole Foods last summer.

Wall Street expected the core CPI to rise 0.2% on the month and 1.7% from a year ago. The consensus called for a 0.3% monthly and 2.0% annual rise in the broad CPI.

After the report, futures for the Dow Jones industrial average, S&P 500 index and Nasdaq composite reversed from solid gains to down more than 1% at one point. The major averages fell modestly at the open but the Nasdaq led an upside reversal.

Menawhile, the 10-year Treasury yield was at 2.88%, back at four-year highs. The odds of a Fed rate hike at the March meeting rose to 83.1% at CME Group’s FedWatch Tool, up from 76.1% on Tuesday. There’s now a 24.2% chance of four or more rate hikes in 2018, up from 17% on Tuesday.

Separately, retail sales unexpectedly fell 0.3% in January and were flat excluding autos.

The CPI report had been as a potential market mover as investors are suddenly nervous about the prospect of faster wage growth, rising inflation and a more aggressive Federal Reserve.

The upside surprise in core prices came as prices for medical services rose 0.6% in month, coming after minimal increases over the past year that left the annual rise at 2.0%. Prices for transportation services rose 0.8% on the month and 4.0% on the year. Meanwhile, apparel prices jumped 1.7%, even as the annual trend remained down 0.7%


IBD’S TAKE: After the Thursday, Feb. 1, market action — when the Dow Jones industrial average was still within 2% of its record high — IBD changed its market outlook to “uptrend under pressure” from “confirmed uptrend,” the equivalent of a green light turning yellow. Make sure to read The Big Picture column each day to stay on top of the market’s prevailing trend, so you’ll know when will make sense to get aggressive again.


Thanks to a just-arriving fiscal boost from tax cuts and more stimulus coming from last week’s $320 billion deficit-hiking spending deal, the balance of economic risks has shifted to the upside. JPMorgan economists are now expecting the jobless rate to fall to 3.2% by the end of 2019, and they think the Fed could raise rates eight times by then.

After January’s jobs report showed that average hourly wage growth accelerated to 2.9% in January from a year ago, after being stuck around 2.5% for most of 2017, markets suddenly started to price in a risk that dormant wage and price inflation may shift into higher gear.

Wage growth is seen a prelude to higher inflation, and there is reason to expect better wage gains, even if the wage acceleration that showed up in January’s employment report was a misleading product of a shorter workweek.

Walmart (WMT) announced in January that it was hiking base pay to $11 an hour, three years after it last announced a boost in starting pay to $9 an hour. Last week, CVS Health (CVS) said it also will adopt an $11 minimum wage in April. Both companies tied their wage hikes at least loosely to their tax cuts, but that’s only part of the story. Competition for quality workers led Target (TGT) to boost its wage to $11 starting last October, when tax reform was still up in the air. At the time, Target made a commitment to raise its base wage to $15 an hour by the end of 2020. Starbucks (SBUX), JPMorgan Chase (JPM) and Wells Fargo (WFC) also are among the dozens of big employers who have hiked wages in the wake of tax cuts.

Even with tax cuts, the risk that wage growth will feed through to higher inflation had appeared modest enough for investors to mostly discount, as consumers have grown to expect internet price transparency and the ever-expanding reach of Amazon to keep inflation in check.

Those competitive dynamics and the need to boost productivity help explain why Walmart, even as it hiked its minimum wage in January, also shut dozens of Sam’s Clubs employing about 10,000 workers, cut 3,500 store co-manager positions and thinned the ranks at its headquarters.

If companies don’t have the luxury of raising prices to offset higher wages, pay hikes stand to cut into profits, which is among the reasons that CVS shares traded lower after announcing wage increases.

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