Inflation report may rattle markets after bond yields climb

By Lewis (JO:LEWJ) Krauskopf

NEW YORK (Reuters) -U.S. inflation knowledge within the coming week may check the nerves of inventory buyers and additional inflame worries about rising Treasury yields and uncertainty over Donald Trump’s coverage plans.

After back-to-back standout years, the inventory market has wobbled out of the gate in 2025, with the benchmark S&P 500 down about 1% to date this yr.

A revival of inflation is seen as one of many key dangers dealing with equities, with the Federal Reserve already pulling again on its projected rate of interest cuts as a result of it expects inflation to rise at a sooner tempo than it had beforehand anticipated.

Markets pushed out expectations for a subsequent price lower till June after a blowout U.S. jobs report on Friday, with shares falling sharply and Treasury yields hitting recent milestones following the December employment knowledge.

The month-to-month shopper value index, due on Jan 15, is among the many most intently watched inflation measures and will spark additional market volatility if it is available in larger than expectations, buyers mentioned.

Month-to-month inflation knowledge can have an “outsized presence out there,” mentioned Marta Norton, chief funding strategist at retirement and wealth providers supplier Empower.

“If we have been to see inflation re-accelerate, that might be regarding to markets,” Norton mentioned. “There’s simply this sort of pins and needles second with each inflation print.”

Focus turned to the inflation knowledge following the surprisingly sturdy employment report for December. Payrolls soared by 256,000, effectively above the 160,000 estimate, whereas the unemployment price fell to 4.1%.

The sturdy jobs development “has added to the uncertainty in regards to the development in inflation, in addition to the prospects for the Fed to chop rates of interest in 2025,” mentioned Sam Stovall, chief funding strategist at CFRA.

The December CPI is anticipated to indicate a 0.3% enhance on a month-to-month foundation, in accordance with a Reuters ballot.

Whereas the Fed was assured sufficient that inflation had moderated to begin reducing rates of interest in September, the tempo of annual inflation has remained above the Fed’s 2% goal. The Fed now tasks inflation will rise 2.5% in 2025.

Minutes from the Fed’s newest assembly, launched on Wednesday, confirmed officers additionally fearful that Trump’s insurance policies on commerce and immigration may lengthen the hassle to carry down inflation.

The Fed is extensively anticipated to pause its rate-cutting cycle at its subsequent assembly on the finish of the month, however firmer-than-expected CPI knowledge may push again market projections for additional easing even later within the yr.

Given “looming questions” about fiscal coverage and potential tariffs, “if the inflationary image that now we have absent these dangers can be shifting within the mistaken route, I believe that may problem market expectations,” mentioned Matt Orton, chief market strategist at Raymond (NS:RYMD) James Funding Administration.

A sizzling CPI quantity additionally may additional raise Treasury yields and have broad fallout. A selloff this week in authorities bonds world wide, which included 10-year UK gilt yields hitting their highest degree since 2008, despatched ripples by means of monetary markets. Yields rise when bond costs fall.

Following the roles knowledge, the benchmark 10-year Treasury yield hit 4.79%, its highest degree since November 2023. Larger yields can strain shares in a number of methods, together with elevating borrowing prices for shoppers and corporations. An increase in Treasury yields can enhance the attractiveness for lower-risk bonds, growing funding competitors for equities.

The CPI knowledge headlines a busy few weeks for markets. Earnings outcomes from main banks resembling JPMorgan and Goldman Sachs within the coming week kick off fourth-quarter stories for U.S. firms. S&P 500 firm earnings are anticipated to have climbed almost 10% within the quarter from a yr earlier, in accordance with LSEG IBES.

President elect Trump will even take workplace on Jan 20. Traders are bracing for fast motion from his administration in areas resembling tariffs on imports from China and different buying and selling companions, in addition to stricter controls on immigration.

Hypothesis about Trump’s plans is already jostling markets. For instance, the greenback fell and European shares rose after a Washington Publish report this week mentioned Trump’s aides have been exploring tariff plans that might solely cowl vital imports. Trump denied the report.

“We’re nonetheless ready to know the power of the chunk with Donald Trump’s bark,” mentioned Bryant VanCronkhite, senior portfolio supervisor at Allspring World Investments.