[New York Stock Exchange] Dow and S&P Fall on Caution Over January CPI 'Surprise Rise'... U.S. Treasury Yields Surge

January CPI Rises 3% Year-on-Year, Exceeding Expectations
Fed Rate Cuts Likely to Be Delayed Further
U.S. 10-Year Treasury Yield Surges
International Oil Prices Drop Over 2% on Hopes for End to Ukraine War
PPI Data Due on 13th, Retail Sales on 14th

The three major indices on the New York Stock Exchange ended mixed in a narrow range on the 12th (local time). Investor caution increased as the Consumer Price Index (CPI) growth rate for the previous month returned to the 3% range, raising expectations that the U.S. Federal Reserve (Fed) will further delay the resumption of interest rate cuts. The yield on the 10-year U.S. Treasury note has surged by about 10 basis points (1bp=0.01 percentage point). International oil prices fell by more than 2% following news that the United States and Russia had agreed to immediately begin negotiations to end the war in Ukraine.

On this day in the New York stock market, the blue-chip Dow Jones Industrial Average (Dow) closed at 44,368.56, down 225.09 points (0.5%) from the previous trading day. The large-cap S&P 500 index fell 16.53 points (0.27%) to 6,051.97, while the tech-heavy Nasdaq index rose 6.09 points (0.03%) to close at 19,649.95.

Investor sentiment weakened as the January CPI rose unexpectedly. According to the U.S. Department of Labor, the January CPI increased by 3% year-on-year. This exceeded both the December figure (2.9%) and the market forecast (2.9%). On a month-on-month basis, the January CPI rose 0.5%, surpassing both the previous month’s figure (0.4%) and the forecast (0.3%). Increases in housing costs, food, and energy prices all contributed to the rise in CPI. Excluding the highly volatile energy and food sectors, the core CPI rose 0.4% from the previous month. The year-on-year increase was 3.3%. Both figures were higher than those for December (0.2% and 3.2%, respectively) and the market forecasts (0.3% and 2.9%, respectively).

With the U.S. economy remaining robust and employment still strong, the rebound in inflation has led key monetary authorities, including Fed Chair Jerome Powell, to signal that the timing of interest rate cuts will be further delayed. Previously, the Fed began a monetary easing cycle in September last year, lowering the peak interest rate of 5.25-5.5% through three consecutive cuts to 4.25-4.5%, before holding rates steady for the first time last month.

Chair Powell appeared before the House Financial Services Committee of the U.S. Congress on this day and, regarding the newly released CPI data, stated, "We are close (to the target), but we have not reached it yet," adding, "For now, we want to maintain a restrictive policy." For the second day in a row, he emphasized a cautious approach to monetary easing.

Raphael Bostic, President of the Federal Reserve Bank of Atlanta, said at a public event on this day, "It will take time to figure out what is happening," and noted that additional rate cuts will occur "(later than) expected." Austan Goolsbee, President of the Chicago Fed, said in an interview with The New York Times (NYT) that the January CPI figure was "sobering," and added, "If these kinds of numbers persist for several months, there is no doubt the Fed has not completed its mission." However, he also stated that he would not overreact to a single data point.

The market is also rapidly lowering its expectations for rate cuts. According to the CME FedWatch Tool, the federal funds futures market on this day reflected a 67.2% probability that the Fed will keep rates unchanged throughout the first half of the year. This is double the 34.1% probability from a week ago. The likelihood of rates remaining unchanged throughout the entire year rose from 10.4% a week ago to 28.7%.

Ellen Zentner, Chief Strategist at Morgan Stanley Wealth Management, commented, "The (inflation) uptrend may last longer and go higher," and added, "The Fed has been waiting for signs that inflation is falling, but this morning, the opposite result came out. The market will need to be patient for further rate cuts until the situation changes."

Investors are focusing on economic indicators scheduled for release this week. The Producer Price Index (PPI) for January, to be released on the 13th, is expected to have risen 0.2% from the previous month, maintaining the prior month’s rate of increase. January retail sales, scheduled for release on the 14th, are expected to remain at the same level as the previous month, indicating a halt in growth. In December last year, retail sales increased by 0.4% compared to the previous month.

Surprise inflation growth is driving up Treasury yields. The yield on the benchmark 10-year U.S. Treasury note rose 9bp from the previous trading day to 4.62%, while the yield on the 2-year note, which is sensitive to monetary policy, rose 6bp to 4.35%.

By stock, Nvidia fell 1.26%. Microsoft (MS) declined 0.71%. Tesla rose 2.99%. CVS Health soared 17.1% on strong fourth-quarter earnings.

International oil prices fell on news that U.S. President Donald Trump and Russian President Vladimir Putin had agreed in a phone call to immediately begin negotiations to end the war in Ukraine. West Texas Intermediate (WTI) crude closed at $71.37 per barrel, down $1.95 (2.66%) from the previous day, while Brent crude, the global oil price benchmark, closed at $75.18 per barrel, down $1.82 (2.36%) from the previous day.