Market Quote: How the Latest U.S. inflation Figures Moved Markets This Week
Author: The editor's desk
January 16, 2025
A mid-week analysis of what’s happening in global financial markets from the perspective of AGF’s investment management team.
Pricing Powered
U.S. equity markets reacted very positively to Wednesday’s Consumer Price Index (CPI) release for December. Headline inflation of +0.4% month-over-month met expectations, but core inflation (excluding food and energy) of +0.2% came in below consensus of +0.3%. This lower core measure dampened concerns on inflation re-acceleration that have pushed out expected U.S. Federal Reserve (Fed) interest rate cuts and weighed on equity markets recently.
In particular, the S&P 500 Index showed broad-based strength across the Consumer Discretionary, Communications, Financials and Technology sectors, while the more defensive Consumer Staples and Health Care sectors lagged.
Volatility is likely to continue as investors navigate the upcoming fourth-quarter earnings season, along with uncertainty on the Fed’s path of interest rate cuts, which remain dependent on inflation and employment data.
Bonding Over Inflation
Since the U.S. Federal Reserve’s (Fed) first rate cut in September 2024, the U.S. 10-year government bond yield has surged by 120 basis points, driven by a shift in Fed rhetoric suggesting future rate cuts may be harder to come by.
This change in tone was likely fueled by stronger-than-expected inflation, robust economic growth, solid employment figures, and the election of U.S. President-elect Donald Trump in November. As a result, many investors are now anticipating only one cut in 2025, with others predicting the Fed won’t cut rates at all this year.
That said, we’ve seen a sharp rally in bonds this week, largely because of the latest U.S. inflation figures released Wednesday that revealed a decline in core inflation last month. This is the first such fall in six months, and the U.S. 10-year yield fell nearly 15 basis points in a single day as market sentiment shifted.
The combination of lower-than-expected inflation and the attractive income that bonds currently provide to investors could be a case to turn bullish on bonds once again.
Loonie Swoon (or Boon)?
The U.S. Dollar (USD) has rallied significantly against most global currencies since U.S. President-Elect Donald Trump was elected in November. The reasons for this strength are numerous, including potential tariff policies, higher U.S. bond yields, geopolitical risk, and stronger economic growth compared to the rest of the world.
But while the Canadian dollar (CAD) has weakened to pandemic-era lows against the USD over this stretch, it has also outperformed other developed economy currencies such as the Euro, British pound and Australian dollar.
Moreover, since the start of the new year, the CAD has strengthened against the USD, likely due to several factors: stretched USD positioning, Prime Minister Justin Trudeau’s resignation, the possibility of a more gradual introduction of tariff policies than originally expected, and softer U.S inflation numbers released earlier this week.
Still, the foreign exchange market remains uncertain, with Trump’s inauguration and major central bank meetings expected to play a role in its direction in the days and weeks ahead.
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