U.S. Stocks Close Mostly Lower on Elevated Inflation
U.S. stocks experienced a predominantly bearish session on Wednesday as investors digested hotter-than-expected inflation data for January. The Dow Jones Industrial Average (^DJI) declined by 0.50%, while the S&P 500 (^GSPC) shed nearly 0.3%. The Nasdaq Composite (^IXIC), however, managed to close marginally above the flatline.
The January Consumer Price Index (CPI) report revealed a more significant increase in headline consumer inflation than anticipated. Stripping out food and energy costs, "core" inflation also reversed its previous month's easing trend, rising by 0.4% over January and 3.3% year-over-year. Both rates surpassed their December levels.
The inflation surprise pushed back investor bets on Federal Reserve interest rate cuts in 2025. On Wednesday, traders priced in only one rate cut, after anticipating two for most of the year. Consequently, the 10-year Treasury yield (^TNX) increased by 10 basis points to almost 4.64% - its highest level in over two weeks.
Corporate earnings reports provided some insights into the resilience of American companies. Kraft Heinz (KHC) shares declined after the packaged food maker's 2025 profit outlook fell short of expectations. In contrast, CVS Health (CVS) saw a boost as investors welcomed a smaller-than-anticipated drop in quarterly profit.
Meanwhile, Reddit (RDDT) stock tumbled after the social media company's mixed fourth-quarter earnings. While its revenue surpassed analysts' estimates, its diluted earnings per share fell below expectations. Robinhood (HOOD), on the other hand, saw a rise in after-hours trading as its quarterly results exceeded Wall Street's projections.
The market entered another "bifurcated" rate environment, with rising inflation pushing the 10-year Treasury yield higher. Rate-sensitive sectors such as Real Estate (XLRE) and the Russell 2000 (^RUT) lagged the S&P 500.
Intel (INTC) extended its rally, supported by bullish comments from Vice President JD Vance about domestic chip manufacturing. Other AI-related stocks also witnessed gains, including defense software company BigBear. aI (BBAI).
While economists remain skeptical about the likelihood of Fed rate hikes this year, they acknowledge that a higher probability of increases in the second half of 2025 cannot be ruled out.
Housing inflation pressures intensified in January, with shelter costs rising by 0.4% month-over-month, reversing the previous month's easing. However, annual growth slowed to 4.4% in January, down from 4.6% in December.
Used car prices jumped significantly in January, marking their largest increase since May 2023. This contributed to an overall rise in CPI of 0.5% over the previous month and 3.0% year-over-year.
Despite the initial decline in the day, the Nasdaq Composite turned positive around midday, driven by a rally in Tesla (TSLA). CVS also reported positive earnings, exceeding Wall Street's expectations.
Fed Chair Jerome Powell acknowledged the uncertainty surrounding the impact of President Trump's tariffs on monetary policy. He stated that the Fed is monitoring various factors, including immigration, fiscal policy, and regulatory policy, before making any policy decisions.
President Trump dismissed the inflation report as "Biden inflation" and called for lower interest rates.
Traders trimmed their bets on Fed rate cuts after the CPI data, with only one cut anticipated later in 2025.
JPMorgan Market Intelligence projected a 2% drop in the S&P 500 if the January CPI exceeded 0.4%. European stocks remained muted ahead of the CPI release, while gold prices pulled back from their record highs.
China's stock surge, driven by AI-related investments, is attracting support from analysts who expect it to continue. Alibaba's shares soared on reports of its collaboration with Apple on an AI business in China.