Investors are paying more attention to inflation, even though Wednesday’s reading from the consumer price index didn’t really shock the markets because it was in line with what Wall Street expected.
At the same time that investors were looking at the CPI figures, they were also thinking about how Donald Trump’s proposed fiscal policies could cause inflation.
Investors didn’t pay much attention to today’s news about U.S. inflation, but they are becoming more worried about the long-term picture, wrote Diana Iovanel, a senior markets economist at Capital Economics, in a note Wednesday. She said, “Investors don’t seem to be too worried about current inflation.” But “future inflation has become top of mind” since last week’s U.S. election.
The S&P 500 (SPX) fell 1.32% on Wednesday, while the Dow Jones Industrial Average (DJIA) went up 0.70%, giving the market a mixed finish. The Nasdaq Composite (COMP) fell 2.24%, giving the market a negative finish.
Keith Lerner, co-chief investment officer and chief market analyst at Truist Advisory Services, said in a phone interview Wednesday that there wasn’t much selling pressure when U.S. stocks went down in the morning trade because the CPI report wasn’t likely to “change the game.” “It wasn’t a shock.”
Dow Jones Market Data shows that the Dow has gone up 4.1% since Election Day on November 5. The S&P 500 has gone up 3.5% and the Nasdaq has gone up 4.3%.
Lerner said that the stock market is still digesting the big jump that was caused by hopes that policies in a Trump White House will be good for growth. According to him, the market is currently more interested in all the good things and is waiting to learn about some of the possible bad things.
For instance, higher tariffs could make prices go up, and buyers will be watching to see how high they go under Trump, he said. Lerner thinks that the market will “begin to deal with policy questions in a more public way next year.”
An “enormous focus” was put on Wednesday’s CPI report because of the “range of outcomes for inflation related to recently solid economic growth, newly elected political officials, and the consequential potential for higher tariffs and higher levels of growth.” This was explained in an email from Rick Rieder, who is BlackRock’s chief investment officer of global fixed income and head of the firm’s global allocation investment team.
“There was a lot of anticipation and then reflection when today’s CPI report came out,” he said. Investors are probably trying to figure out how the Federal Reserve will respond to the new inflation reading.
“The truth is, though, that the Fed looks at a number of inflation readings, with a greater focus on the core PCE measure,” he said, referring to the personal-consumption-expenditures price index.
In the meantime, U.S. inflation has slowed down a lot since its high point in 2022, but it is still above the Federal Reserve’s 2% goal.
Rieder said that the CPI reading on Wednesday showed that inflation is “still firm.” Core CPI, which doesn’t include prices for food and energy, went up 0.3% in October and 3.3% year over year.
According to the CPI data, “core PCE will also see a monthly gain that displays considerably lower inflation than we have been used to over the past few years, yet an inflation trajectory that has probably wrung out most of the potential inflation improvement for much of the goods economy and some of the services sector,” Rieder said.
He thinks that the Federal Reserve may lower its main interest rate once more at its meeting in December, “and then figure out where the inflation trajectory is from here.”
At the last check on Wednesday, the CME FedWatch Tool showed that after the CPI report, traders in the federal-funds futures market thought there was an 82.5% chance that the Fed would lower its benchmark rate by a quarter percentage point next month. The rate is currently held at a goal range of 4.5% to 4.75%.
If you look at the short term, Lerner said that the U.S. stock market could keep going up until the end of the year because of a strong economy, rising corporate earnings, the Federal Reserve “easing mode,” and a recent drop in oil prices.
The rate on a 10-year Treasury note has gone up a bit since the election in the United States. Before that, the 10-year Treasury yield may have gone up because people were betting that Trump would win, but Lerner said it also went up because of good economic news. He showed the following graph that shows the Citi Economic Surprise Index for the U.S. and the 10-year yield. The 10-year yield is shown in pink, and the Treasury rate has been going up since September.
Dow Jones Market Data shows that the yield on the 10-year Treasury note TMUBMUSD10Y4.444% went up by 1.8 basis points to 4.448% on Wednesday. The yield on the two-year Treasury note TMUBMUSD02Y 4.331% went down by 6.1 basis points to 4.281%.
“Upside of inflation”
In her note, Iovanel said that the recent rise in the 10-year Treasury yield is likely due to “the inflationary nature” of Trump’s plans.
Lerner said that “wider swings in the 10-year Treasury” would show some of the policy uncertainty and questions about the size of the U.S. debt that will come up under the next White House. “It seems like it would happen in this case as the swings get bigger every day.”
Prices and returns on bonds go against each other.
Since yields have been going up lately, it has been hard for popular exchange-traded funds that track indexes that give broad exposure to the U.S. investment-grade bond market.
FactSet data shows that the iShares Core U.S. Aggregate Bond ETF (AGG 0.01%) and the Vanguard Total Bond Market ETF have both lost value over the last three months. This means that they have only earned 1.5% so far this year.
To date, Rieder is in charge of the iShares Flexible Income Active ETF (BINC 0.06%), which invests globally across fixed-income sectors. Over the past three months, the fund has gained total return of 5.2%, giving it a 5.2% gain for the year to Wednesday.
“With a new set of fiscal policy goals and ideals, the markets have probably seen inflation going up as a more likely outcome,” Rieder said. “It’s hard to disagree with this market view, but over the next few months we will also learn a lot more about what the new policy will be.”
