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The stock market was governed by some churning action on Tuesday as it dealt with some familiar viewpoints, namely Fed Chair Powell's reminder during his semiannual monetary policy testimony that the Fed does not need to be in a hurry to adjust its policy rate, and President Trump's announcement of 25% tariffs for steel and aluminum imports.
We would contend, too, that market participants were holding their fire before the January Consumer Price Index (CPI), which was released at 8:30 a.m. ET this morning.
Prior to the report, there was little conviction in the equity futures market and the Treasury market. That quickly changed after the release, which had its surprises.
Total CPI increased 0.5% month-over-month in January (Briefing.com consensus 0.3%) following a 0.4% increase in December. Core CPI, which excludes food and energy, increased 0.4% month-over-month (Briefing.com consensus 0.3%) following a 0.2% increase in December.
On a year-over-year basis, total CPI was up 3.0%, versus 2.9% in December, while core CPI was up 3.3%, versus 3.2% in December.
The key takeaway from the report is that the inflation readings moved in the wrong direction for the Fed's policy comfort (and that's before any possible impact from tariff actions), which will keep the market on edge about the Fed perhaps not cutting rates at all this year or maybe even having to keep a rate hike on its policy deliberation table.
The fed funds futures market still sees the prospect of one rate cut in 2025, although it has been pushed back to the September FOMC meeting (a close call versus October) from the July FOMC meeting in the wake of today's CPI data, according to the CME FedWatch Tool.
Currently, the S&P 500 futures are down 65 points and are trading 1.0% below fair value, the Nasdaq 100 futures are down 262 points and are trading 1.2% below fair value, and the Dow Jones Industrial Average futures are down 433 points and are trading 1.0% below fair value.
The Treasury market tacked in a similarly nervous fashion. The 2-yr note yield, at 4.28% before the release, is up seven basis points to 4.36%, and the 10-yr note yield, at 4.53% before the release, is up 10 basis points to 4.64%.
The CPI surprises for January, which is a month that sees many companies make early-year price adjustments, has undone a lot of the goodwill that followed the December CPI report in mid-January. The 10-yr note yield went from 4.79% to 4.65% on the day of that release on its way to 4.44% as recently as February 6.
This move in rates, which is diametrically opposed to the Trump administration's aim per Treasury Secretary Bessent, is also diametrically opposed to the idea of multiple expansion for a stock market already sporting a full/rich valuation.
Now, though, it really gets interesting. The retail crowd has had no fear, stepping up to buy every dip that has the S&P 500 levitating near an all-time high. The opportunity will be ripe for that crowd again today in that there is going to be a dip at the open. The question is, will they respond per usual? This latest inflation news is not a good fundamental development.
Understandably, the CPI report has taken precedence over the latest batch of earnings results as the market driver. CVS Health (CVS), which is up 9.1% after its report, is evidence that there is room for idiosyncratic advances amid the difficulties for the broader market, which will also be taking in day two of Fed Chair Powell's semiannual monetary policy testimony at 10:00 a.m. ET and the results of the $42 billion 10-yr note auction at 1:00 p.m. ET.
