Inflation Concerns Jitter the Stock Market
The stock market has shown sensitivity to inflation expectations in recent weeks. Negative market reactions have followed any news indicating potential higher-than-expected inflation in 2025.
Despite initial sell-offs, market concerns have been short-lived. For example, a sell-off following higher consumer inflation expectations in the University of Michigan's Survey of Consumers was partially erased within two days.
The latest Consumer Price Index report revealed price increases above Wall Street expectations, leading to a market belief that the Federal Reserve (Fed) would cut interest rates only once in 2025, rather than twice as previously anticipated. However, some economists maintain that the rate cut may not occur this year, while a rate hike is becoming more feasible.
Despite the possibility of a rate hike, the stock market closed only slightly lower on the day. This suggests that markets may still be pricing in a rate cut this year. As long as market participants believe that the Fed will not tighten interest rates significantly, the bull case for stocks remains intact.
Piper Sandler's Michael Kantrowitz identifies higher rates as the market's primary concern. A rise in the 10-year Treasury yield has often coincided with decreased investor expectations for rate cuts. Thus, if markets shift to pricing in rate hikes, the 10-year yield may rise as well.
Kantrowitz highlights a potential disparity in returns based on interest rate sensitivity. Stocks heavily influenced by interest rates, such as Real Estate and the Russell 2000, could suffer, while those less affected by rate changes could continue to perform well.
Kantrowitz also suggests that recent tariff concerns may be driven by investors' fears of inflation and higher interest rates. Therefore, while the focus has shifted from tariffs to inflation, interest rates remain the overarching market narrative.