Last week’s inflation data gave the market a real shot in the arm.
The S&P 500 and Nasdaq gained 1.8% and 2.3%, respectively, from the previous day’s close. And the Dow Jones closed up just over 700 points on the day.
The reason behind the rally was a slight drop in the Consumer Price Index (CPI) core inflation. Core inflation excludes the volatile food and energy categories. The Federal Reserve watches this number closely.
Core inflation tracked at 0.3% month-over-month (MoM) from August through November. December’s core inflation print fell slightly to 0.2%.
Year-over-year (YoY) core inflation also improved slightly to 3.2%. That was down 0.1% from the previous three month’s readings.
Of course, whenever you see a positive reading like this, the bulls cheer…
They believe it increases the chances that the Fed will continue cutting rates, driving stocks even higher.
But there’s a problematic part of the inflation picture that we shouldn’t miss…
Inflation Has Stopped Falling
A glance at regular CPI inflation paints a different picture.
It rose 0.4% MoM – its highest reading since March last year. That was also a 0.5% jump since its -0.1% reading in June.
U.S. Inflation Rate (MoM)
Source: U.S. Bureau of Labor Statistics, TradingEconomics.com
Inflation is trending higher. The YoY data released the same day backed that up. December’s YoY reading came in at 2.9% – up 0.2%. You can see the trend in the chart below:
U.S. Inflation Rate (YoY)
Source: U.S. Bureau of Labor Statistics, TradingEconomics.com
When inflation rises like this, the Federal Reserve has little room to cut rates. And inflation is just one part of the equation…
Already in 2025, positive economic data has swamped the markets.
The Institute of Supply Management reported strong readings in the services and manufacturing sectors. And the jobs market has started 2025 with a bang…
The Job Openings and Labor Turnover Survey (JOLTS) reported a 400,000 increase. And the economy also added over a quarter of a million nonfarm payroll (NFP) jobs in December.
When inflation is rising and the economy is strong, rate cuts would be a strange decision.
|
Free Trading Resources Have you checked out Larry’s free trading resources on his website? It contains a full trading glossary to help kickstart your trading career – at zero cost to you. Just click here to check it out. |
Short-Lived Rally
So despite the market’s excitement following last Wednesday’s inflation print, the bounce will likely be brief.
As I wrote last week, the market has to face the possibility of no rate cuts this year.
And rather than getting bogged down by unlikely rate moves, traders should focus on another upcoming catalyst…
Big Tech earnings are about to get underway. And they have far more potential to move the markets.
The big question: Are companies converting AI hype into profits? If not, we could start to see cracks form…
So as the markets come up with an answer over the coming weeks, traders should keep their eyes peeled for some big tradeable moves.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict