Stock and bond exchange-traded funds (ETFs) surged following a report from the U.S. government indicating that core consumer prices increased less than anticipated in December. The data provided investors with relief amid ongoing inflation concerns.
The SPDR S&P 500 ETF Trust (SPY) rose by as much as 1.9%, while the iShares 20+ Year Treasury Bond ETF (TLT) gained 2%. This came after the Bureau of Labor Statistics (BLS) revealed that core prices—excluding food and energy—rose by 0.2% from November to December, falling short of economists’ expectations for a 0.3% increase.
Leading up to the release of the Consumer Price Index (CPI) report, market participants had braced for potential volatility. Despite strong economic growth in recent months, the Federal Reserve’s recent caution about persistent inflation had fueled concerns. As a result, traders had previously lowered expectations for Federal Reserve rate cuts, and Treasury bond yields had surged, with the 10-year and 30-year Treasury bond yields reaching their highest levels since late 2023, threatening to surpass 5%.
However, the latest CPI data alleviated some of those inflation fears, leading to a notable drop in bond yields by more than 10 basis points.
Although markets are still not anticipating significant Federal Reserve rate cuts in 2024, with federal funds futures indicating only a single rate reduction in 2025, the new inflation figures have softened some of the more extreme predictions of aggressive Fed rate hikes. This is especially crucial with inflation-sensitive markets continuing to watch for potential tariff risks under the incoming Trump administration.
S&P 500 Index Shows Volatility as CPI Data Provides Relief
Before the CPI release, the S&P 500 Index had dropped as much as 5% from its record highs, while the Cboe Volatility Index (VIX), a gauge of market fear, briefly surpassed 20 for the first time in a month.
The BLS report highlighted a cooling of shelter price growth in December, helping to offset an uptick in goods prices. Despite a higher-than-expected 0.4% increase in headline CPI, which accounts for all consumer goods and services, the rise was driven largely by a jump in energy prices.
For the Federal Reserve, however, the focus remains on core inflation measures that exclude volatile food and energy prices. The central bank also prioritizes the personal consumption expenditures (PCE) price index, which has been running lower than CPI inflation.
With inflation concerns easing somewhat following the latest data, investors will continue to monitor future economic indicators and the Federal Reserve’s next moves closely as markets navigate a potentially volatile year.
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