Stock Traders Are Cautious After CPI Report

Key Insights

• Inflation Rate declined from 7.1% to 6.5%, in line with analyst expectations. 
• Gold made an attempt to settle above the $1900 level. 
• S&P 500 moved lower as stock traders expected that inflation would fall below analyst estimates. 

Inflation Data Met Analyst Expectations

Today, traders will stay focused on the CPI data from the U.S., which will serve as the key driver for markets.

U.S. reported that Inflation Rate declined from 7.1% in November to 6.5% in December. Core Inflation Rate decreased from 6% to 5.7%. Both reports met analyst expectations.

The reports indicated that inflation continued to slow down. Importantly. Core Inflation Rate fell in line with the analyst expectations. Fed’s interest rate hikes have already put material pressure on inflation.

Inflation Rate is declining for a sixth month in a row, after peaking at 9.1% in June. Core Inflation Rate is decreasing for a third month in a row, after peaking at 6.6% in September.

U.S. Dollar Fell To New Lows

The FedWatch Tool indicates that there is a 91.7% probability of a 25 bps rate hike at the next Fed meeting. The market expects that federal funds rate will peak at 475-500 bps. According to market’s expectations, the Fed will not be able to push rates above the 5.00% level. Traders also believe that the Fed will start cutting rates in November 2023.

Market’s expectations are more dovish compared to the recent signals from Fed speakers. According to Fed speakers, the Fed may push rates above the 5.00% level and will not cut rates this year.

The U.S. dollar fell to multi-month lows against a broad basket of currencies. The U.S. Dollar Index made an attempt to settle below the 103.30 level.

Treasury yields moved lower after the release of inflation data but lost momentum and rebounded towards pre-report levels.

The weak dollar provided material support to gold, which tested new highs at $1901.

Interestingly, S&P 500 pulled back at the start of the trading session. It looks that stock traders expected that inflation would be below analyst expectations.

For a look at all of today’s economic events, check out our economic calendar.