US Stocks Drop as CPI Fails to Lift Interest-Rate Cut Bets

A trader works on the floor of the New York Stock Exchange (NYSE) in New York on Jan. 5. Photographer: Michael Nagle/Bloomberg Photo by Michael Nagle /Bloomberg

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(Bloomberg) — US stocks fell on Tuesday as the latest inflation data failed to shift interest-rate cut bets and traders examined fresh earnings reports.

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The S&P 500 Index declined 0.2%, pulling back from Monday’s all-time closing high and snapping a three-session streak of gains. The tech-heavy Nasdaq 100 Index declined 0.2%. Meanwhile, the Russell 2000, which closed at a record on Monday and extended its winning streak over the S&P 500, rose 0.01%.

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“In the near term, inflation will run hotter than policymakers would like, so we expect the Fed to pause this month and possibly in March,” said Jeffrey Roach, chief economist for LPL Financial. “However, by the time the Committee convenes in April and June, conditions will likely warrant another cut in rates. For now, the balance of risks tilt toward the weakening labor market.”

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Underlying inflation rose less than expected in December, according to data from the Bureau of Labor Statistics. The core consumer price index, excluding food and energy, increased 0.2% from November. 

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On an annual basis, inflation had risen 2.6%, matching a four-year low. While November’s report had cooled to a four-year low, there were a number of caveats. The reading for December is potentially a more convincing sign of inflation being on a downward path.

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“Tuesday’s CPI was in-line with expectations and that will likely keep the Federal Reserve on pause when it comes to interest rates for the foreseeable future,” said Skyler Weinand, chief investment officer at Regan Capital in Dallas.

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Inflation remains “way off” the Fed’s target, XTB’s Kathleen Brooks notes, adding that there is no clear disinflation trend in the economy. The combination of elevated wage growth and a strong economy may keep price pressures above the target rate for the foreseeable future, she added.

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“Broadly speaking, the December inflation report was more reassuring than concerning, despite a surge in food costs and a stubborn stickiness to price increases that continue to vex Fed policymakers and delay a return to their 2% inflation target,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors.

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Bank Earnings Kick Off

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Earnings season kicked into full gear with several big names on the S&P 500 reporting. JPMorgan Chase & Co. declined after the lender’s investment-banking fees unexpectedly fell in the fourth quarter. The bank also warned that President Donald Trump’s call for a 10% cap on credit card rates threatens to “significantly change” its business.

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On a conference call with members of the media following the results, JPMorgan’s Chief Executive Officer Jamie Dimon said the Justice Department’s attacks on the Fed could undermine its independence as well as boost borrowing costs. Chipping away at the autonomy of the central bank is “probably not a great idea,” Dimon noted.

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Bank of New York Mellon Corp. advanced after the lender’s profit beat analyst estimates, driven by gains in fee revenue and interest income. Elsewhere, Delta Air Lines Inc. declined after providing a profit forecast that fell short of estimates.

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