US Stocks Fall on Inflation Surprise
US stocks closed mostly lower on Wednesday as investors digested a hotter-than-expected inflation reading for January. The Dow Jones Industrial Average (^DJI) dropped 0.5%, while the benchmark S&P 500 (^GSPC) slipped nearly 0.3%. The tech-heavy Nasdaq Composite (^IXIC) finished just above the flatline.
The Consumer Price Index (CPI) released Wednesday showed that headline consumer inflation rose more than forecast in January. "Core" prices, excluding volatile food and energy costs, reversed the previous month's easing trend, rising 0.4% over last month and 3.3% over last year. Both rates exceeded December's levels.
The surprise inflation print pushed back investors' hopes for interest rate cuts in 2025. As of Wednesday, traders were pricing in only one interest rate cut, after factoring in two for most of the year. Following the inflation data, the 10-year Treasury yield (^TNX) increased by 10 basis points to just below 4.64%, its highest level in over two weeks.
Earnings reports offered insights into the resilience of corporate America. Kraft Heinz (KHC) shares declined after the packaged food maker's 2025 profit outlook fell short. On the other hand, CVS Health (CVS) stock gained as investors welcomed a smaller-than-expected drop in quarterly profits.
A fresh round of earnings provided clues into the resilience of Corporate America. Kraft Heinz (KHC) shares slid after the packaged food maker's 2025 profit outlook fell short. But CVS Health (CVS) stock got a boost as investors welcomed a smaller drop in quarterly profit than expected.
The market has entered a "bifurcated" rate environment once more. The rise in the 10-year Treasury yield to 4.63% led to the typical market reaction observed in the past year when rates rise. Market sectors highly sensitive to interest rates, such as Real Estate (XLRE) and the small-cap Russell 2000 (^RUT), fell approximately 0.7%, lagging behind the 0.4% decline seen in the S&P 500 (^GSPC).
According to Piper Sandler chief investment strategist Michael Kantrowitz, the 10-year Treasury Yield at 4.63% could deliver "bifurcated" returns, where stocks impacted by interest rate refinancing suffer while those with minimal earnings impact continue to perform well.
Inflation pressures intensified in the housing sector in January, reversing the easing trend from the previous month. Data from the Bureau of Labor Statistics indicated that shelter costs rose 0.4% in January on a monthly basis, exceeding December's 0.3% increase. On an annual basis, prices rose 4.4% from a year earlier in January, slower than the 4.6% reported in December and the lowest 12-month increase since January 2022.
Used car prices jumped the most since May 2023, driven by shrinking inventory. In January's Consumer Price Index (CPI), new car prices remained flat and were down 0.3% compared to a year ago, while used vehicles rose 2.2% in January and 1.0% for the year.
The Nasdaq Composite briefly flipped into positive territory around midday ET, helped by a rally in Tesla (TSLA) shares which gained over 4%.
CVS Health (CVS) reported earnings that beat Wall Street expectations, sending its stock up more than 14%. Full-year revenue reached $372.8 billion, and fourth-quarter revenue came in at $97.7 billion, surpassing analysts' estimates of $96.8 billion.
Fed Chair Jerome Powell emphasized uncertainty in the path of interest rates amid President Trump's proposed tariffs. He stated that the Fed is monitoring the potential impact of tariffs, immigration, fiscal policy, and regulatory changes on the economic outlook.
Despite a hotter-than-expected inflation reading, markets pared back expectations for rate cuts in 2025 to just one, likely to occur later in the year.
JPMorgan Market Intelligence estimates that the S&P 500 (^GSPC) could decline up to 2% if the Consumer Price Index (CPI) rises 0.4% or more in January from the previous month. Markets anticipate the release of CPI data at 8:30 a.m. ET.
European stocks held steady on Wednesday, mirroring the muted tone in global markets ahead of the release of US consumer inflation data. The pan-European Stoxx 600 (^STOXX) index edged up less than 0.1%.
Gold retreated from a recent all-time high on Wednesday after Jerome Powell's comments suggesting the Fed had no rush to cut interest rates. Gold bullion prices dropped below $2,890 an ounce and gold futures slid almost 1%.
China's AI-driven stock surge has gained support from Wall Street analysts, who believe the country’s emerging technology capabilities will sustain the bull market. Analysts from Morgan Stanley (MS), JPMorgan Chase & Co (JPM), and UBS Group AG (UBS) predict continued stock gains driven by DeepSeek's artificial intelligence model.
Alibaba (BABA) stock surged over 10% on reports that Apple (AAPL) is collaborating with the Chinese e-commerce platform to enter China's artificial intelligence market.