Wall Street took a nosedive Tuesday following the before-the-bell release of hotter-than-expected January consumer inflation data. In response, bonds sold off, pushing the 10-year Treasury yield above 4.30% and equity prices sharply lower. The Dow , the S & P 500 and the Nasdaq were all down more than 1.5%, as the odds of a Federal Reserve interest rate cut in May dropped to 33% from prior levels above 61%, according to the CME FedWatch Tool. The headline consumer price index (CPI) number was up 0.3% in January versus 0.2% expected, and up 3.1% year over year versus up 2.9% expected. The core rate , excluding food and gas prices, was up 0.4% month over month versus up 0.3% expected, and up 3.9% year over year versus up 3.7% expected. Jim Cramer has been saying for a while now that the economy remains too strong for a rate cut anytime soon. Tuesday's CPI print interrupted a run of numbers pointing to cooling inflation trends. It remains to be seen whether this is a one-month blip or not. But in an economy as resilient as we've seen in the face of 11 rate hikes starting in March 2022, the risk of rekindling inflation is always a concern. Shelter costs, which account for roughly one-third of headline CPI and even more at the core level, continued to stand out as a major area of stickiness. Under services, the shelter component was an upside surprise, increasing 0.6% monthly and 6% year over year. Other sources of upward pressure on core CPI came from medical care , up 0.7% month over month and up 0.6% year over year, and transportation , up 1% monthly and up 9.5% annually. Against that, still focusing on the core index, commodities with roughly a 19% weighting, declined 0.3% on both a monthly and year-over-year basis, new vehicle prices were unchanged monthly but up 0.7% annually; used cars and trucks were down 3.4% monthly and down 3.5% year-over-year; apparel was down 0.7% monthly and ticking up only 0.1% annually; and medical care commodities were down 0.6% monthly, though up 3% year-over-year. In other words, the prices of services continue to advance at too hot of a pace while the decline in goods costs is not proving enough to offset it them. So, how do we play this? Obviously, a resurgence of inflation over a prolonged period would be a clear negative, resulting in higher Treasury yields – and in turn, lower equity prices. However, we aren't ready to draw that conclusion based on one month's report – especially considering the headline CPI print is below the December level and the core index is in line with what we saw in December. By no means are we dismissing this January reading. An uptick in inflation is absolutely a tail risk that needs to be respected and monitored. However, we're not ready to get bearish on the stock market on this release alone. For starters, the January CPI supports the view that the Fed has not overtightened and is justified in holding rates higher for longer. At the very least, there is no rush to cut in fear of a “hard landing” for the economy. Jim has said the debate over a “hard landing” versus a “soft landing” coming out of such an aggressive Fed tightening cycle should really be a “no landing,” meaning an economy that chugs along and inflation continues moderates. Again, we'd need to reassess if January's numbers are the start of a multi-month upswing in price pressures. The funny thing about inflation is that while it does on the one hand negatively impact demand due to reduced affordability, it's also supported by demand. The only way the high prices can be sustained in a free-market economy is because there is still enough demand at those higher prices. Thus, the saying, “The best cure for high prices is, high prices.” In other words, there is demand for goods and more so for services. That's a positive for corporate sales and profits, at least on a nominal basis. Therefore, we think the decline in the stock market is buyable. Bottom line As of Monday's close, the S & P 500 Short Range Oscillator was pretty neutral – neither oversold nor overbought. We'll have to see if Tuesday's decline tips the scales into oversold. And like how one month's CPI reading doesn't make a trend, the same is true for the market. This year has been strong for the most part. There was some weakness at the beginning and some weak sessions such as Tuesday. So, the coming days in the market will tell us if we're in a rough patch or whether the market just needed to be dragged kicking and screaming into the reality that it was way too dovish compared to what the Fed has been saying and now the market needs to bring down its rate cut expectations for this year. (See here for a full list of the stocks in Jim Cramer's Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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Traders work on the floor of the New York Stock Exchange during afternoon trading on February 05, 2024 in New York City. Michael M. Santiago | Getty Images
Wall Street took a nosedive Tuesday following the before-the-bell release of hotter-than-expected January consumer inflation data. In response, bonds sold off, pushing the 10-year Treasury yield above 4.30% and equity prices sharply lower. The Dow, the S&P 500 and the Nasdaq were all down more than 1.5%, as the odds of a Federal Reserve interest rate cut in May dropped to 33% from prior levels above 61%, according to the CME FedWatch Tool.
The headline consumer price index (CPI) number was up 0.3% in January versus 0.2% expected, and up 3.1% year over year versus up 2.9% expected. The core rate, excluding food and gas prices, was up 0.4% month over month versus up 0.3% expected, and up 3.9% year over year versus up 3.7% expected.
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