January Inflation Expected To Fall To 3-Year Low: How Will Markets React?

Investors might receive a pleasant surprise from January’s inflation report, according to economists’ predictions.

Scheduled for release this Tuesday at 8:30 a.m. ET, the Bureau of Labor Statistics is set to unveil last month’s Consumer Price Index (CPI) data, which could provide additional insights into the potential direction of interest rates in the months ahead.

January CPI Preview: What Are Economists Expecting?

• Economists are projecting a notable decline in the annual headline inflation rate, from 3.4% in December to 2.9% in January, driven by base effects and lower energy prices. Should these forecasts hold true, it would mark the lowest inflation rate since February 2021.
• On a month-over-month basis, the CPI is expected to rise by 0.2%, maintaining December’s growth rate.
• Excluding volatile components such as energy and food, the annual core inflation rate is anticipated to decrease from 3.9% to 3.7%, the lowest point since April 2021.
• Month-over-month, core inflation is also expected to continue at a 0.3% growth rate, mirroring December’s figure.

Chart: US Inflation Predicted To Fall Below 3% For The First Time In Almost Three Years

How Could Markets React?

Currently, the market is pricing in nearly a 60% likelihood of a rate cut by May and anticipates up to 120 basis points of cumulative cuts in 2024.

An inflation report for January that aligns with or falls below expectations could be warmly welcomed by investors, reinforcing the belief that the Federal Reserve might lower interest rates sooner rather than later.

Although Fed Chair Jerome Powell has sharply tempered expectations for a rate cut in March, he underscored the importance of data monitoring to gauge increased confidence in the inflationary downtrend.

A reinforcement in market expectations for rate cuts could positively influence stocks and bonds, while potentially weakening the dollar.

The S&P 500 Index has recently surpassed the 5,000-point threshold, showing a 6% increase since the year’s beginning. The Nasdaq 100 has outperformed, with an 8% rise since the start of 2024.

Conversely, a slower-than-anticipated decline in inflation, especially with stubborn core inflation, could heighten prospects of the Fed maintaining steady rates for an extended period. This scenario could lead to a decrease in the current 60% probability of a May rate cut, negatively affecting financial assets.

Market Reaction to December 2023’s CPI Data

Despite expectations for a 3.2% increase, December 2023’s inflation rate unexpectedly rose to 3.4% year-on-year.

Following the hotter-than-anticipated December CPI data, major US ETFs and stocks reacted as follows, according to Benzinga Pro platform data:

• SPDR S&P 500 ETF Trust SPY remained unchanged
• Invesco QQQ Trust QQQ increased by 0.2%
• Dow Jones Industrial Average ETF DIA showed no change
• iShares Russell 2000 ETF IWM fell by 0.8%
• Tesla Inc. TSLA dropped by 2.9%
• Netflix Inc. NFLX climbed by 2.9%

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