Stock and bond exchange-traded funds (ETFs) saw a significant rise on Wednesday after the U.S. government released data showing that core consumer prices increased less than expected last month.
The SPDR S&P 500 ETF Trust (SPY) surged by as much as 1.9%, and the iShares 20+ Year Treasury Bond ETF (TLT) climbed by 2%. This came after the Bureau of Labor Statistics reported that core prices, which exclude food and energy, rose by just 0.2% from November to December. This was lower than the 0.3% increase economists had predicted.
Investors Were Concerned Before the Data Release
Before the inflation report was released, investors were bracing for potential market volatility. Economic growth had remained strong, and the Federal Reserve had warned that inflation was more persistent than expected.
As a result, traders adjusted their expectations for Federal Reserve rate cuts, and Treasury bond yields spiked. The 10-year and 30-year Treasury bond yields reached their highest levels since late 2023, coming close to breaking above the 5% mark.
Inflation Data Eases Market Concerns
The latest Consumer Price Index (CPI) data helped ease inflation concerns, causing yields to drop by more than 10 basis points. While investors still do not expect significant rate cuts this year, the CPI data calmed some fears, removing the most pessimistic forecasts of aggressive Fed rate hikes.
Market sentiment remains sensitive to inflation, especially as the new Trump administration is considering imposing heavy tariffs on U.S. trading partners.
S&P 500 Index and Volatility
The S&P 500 Index had fallen by as much as 5% from its all-time highs before the CPI report, and the Cboe Volatility Index, which measures market fear, briefly surpassed 20 for the first time in a month.
Shelter Prices Helped Moderate Inflation
The CPI report showed that the growth in shelter prices slowed down in December, helping to offset the acceleration in goods prices. However, headline CPI, which includes all consumer goods and services, rose by 0.4% from November to December—higher than the expected 0.3%. The increase was mainly due to rising energy prices.
Fed’s Focus on Core Inflation
The Federal Reserve typically prefers core inflation measures, which exclude volatile food and energy prices. The central bank also favors the Personal Consumption Expenditures (PCE) price index over the CPI. Inflation measured by the PCE has been running below the CPI. The next PCE report is scheduled for release on January 31.
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