(Reuters) - U.S. consumer prices rose more than expected in January, with a measure of underlying inflation posting its biggest gain in a year, strengthening expectations that price pressures will accelerate this year and prompt a faster pace of interest rate increases from the Federal Reserve.
Also released Wednesday morning, U.S. retail sales unexpectedly fell in January, recording their biggest drop in nearly a year, as households cut back on purchases of motor vehicles and building materials.
** U.S. January CPI up 0.5 percent month-to-month, beating estimates for a 0.3 percent gain
** U.S. core CPI, minus food and energy prices, up 0.3 percent, higher than consensus forecast for 0.2 percent gain
** Year-over-Year, Jan CPI rose 2.1 percent and core rose 1.8 percent, versus forecasts for 1.9 percent and 1.7 percent gains, respectively
JUAN PEREZ, SENIOR FX TRADER AND STRATEGIST, TEMPUS, INC, WASHINGTON.
“Retail Sales truly disappointed. They kept the dollar from blowing up after stellar CPI. People need to be buying things in order for the economy to grow and it seems like we’re lacking on that.”
JOSEPH LAVORGNA, CHIEF ECONOMIST, AMERICAS, NATIXIS, NEW YORK
“The big issue for the Fed is whether they can resist the urge to tighten rates aggressively. Higher inflation will be the only way the Fed will normalize and do it in a way that’s not going to be destabilizing to financial markets because they created this monster rally in risk assets.”
“Inflation has to be put into context. The year-over-year rate on the core is still below 2 percent. The core PCE (personal consumption expenditures index), which the Fed thinks is better, is even lower, well below 2 percent. So January looked high but relative to the broader trends and where we’ve been, they should be embracing higher inflation, they should let it pick up a bit.”
JOHN CANAVAN, MARKET STRATEGIST, STONE & MCCARTHY RESEARCH ASSOCIATES, NEW YORK
“Treasuries yields have shot up with intermediates bearing the brunt of the selling. The losses in bonds have been mitigated by safe-haven bids due to the sharp decline in equity index futures. The market had recently been pricing in a faster pace of rate increases from the Fed. Even though the retail sales numbers came in weaker-than-expected, the broad outline for the economy is quite strong this year. This will weigh on the front end of the yield curve. We are going to more direct pricing of rate hike expectations on the front end, and it’s filtering into the intermediate part of the yield curve.”
JASON WARE, CHIEF INVESTMENT OFFICER, ALBION FINANCIAL, SALT LAKE CITY
“I’m not sure the number is that hot. A 2.1 percent print was a bit higher than expectation, it was a little over-consensus, but not a blow out. What it shows is that the equity market is still jittery around the inflation narrative and anything that crystallizes that is creating equity volatility.”
“But you’re still taking about (inflation) in the range of what Yellen and Bernanke would call target. But the equity markets are still trying to adjust to a new normal that inflation will be higher than they previously expected.
“Treasuries - we will see where they go but even at 2.88 it’s not real competition to equities, but 3.5 or 4 would have a potentially violent ripple through stock prices. It’s about the pace and ultimately where we end up.”
“(Dollar up) is good, in my view dollar up means potentially less inflation so if equity investors are worried about inflation drifting higher, then a stronger dollar cools that.”
DENNIS DE JONG, MANAGING DIRECTOR, UFX.COM, LIMASSOL, CYPRUS:
“It seems Fed chairman Jerome Powell may have to tighten his monetary policy more quickly and aggressively than forecasts predicted, after the latest U.S. inflation readings came in above expectations. Gauging the mood from traders, at least two more rate hikes are now expected this year, with some anticipation of a third climb arriving before the end of 2018.”
STEVEN ENGLANDER, HEARD OF RESEARCH AND STRATEGY, RAFIKI CAPITAL, NEW YORK:
“In some ways you would say this is the worst possible number for U.S. equities: extremely weak U.S. retail sales and a higher CPI. I think there is less to the numbers than meets the eye, however.”
“It does play into the fears that we are getting into a different inflation regime than we were before. The last ten years was below target inflation and now the expectations are adjusting upwards, which means the Fed is not as friendly.”
“It doesn’t mean that equities should collapse, but what it does mean is the days of sub-10 on the VIX are done and it should settle closer to historical norms of 13 or 15.”
GENNADIY GOLDBERG, INTEREST RATE STRATEGIST, TD SECURITIES, NEW YORK
“That was definitely a strong number. The fact that we were a hair away from being 0.4 percent certainly got the markets excited that we are finally seeing some signs of inflation. It seems to be pretty broad based.
“For the markets it is a bearish signal, you are certainly seeing Treasuries back up. We still think it should be more of a curve steepening effect. Given the weak retail sales report alongside this the markets are probably going to talk about stagflation, where you are getting stronger inflation but not really getting a stronger consumer, which is damaging. Those two in tandem might be leading to this flattener in Treasuries, though retail sales are pretty volatile.”
PHIL ORLANDO, CHIEF EQUITY STRATEGIST, FEDERATED INVESTORS, NEW YORK
“Months tend to be noisy. We saw a 0.5 number last September, and then it calms down. This is why you ignore months and look at the long-term core year-over-year trend. So the market is doing exactly what the market does, it shoots first and asks questions later. It’s captivated by this 0.5 number. It’s ignoring the trend, which is 1.8 percent.
“What they’re saying is, ‘OK, 0.5 that’s stronger than expected, I’m going to multiple that by 12 and that gives me a 6 percent inflation trend.’ We’re not growing inflation at 6 percent. We’re growing inflation at 1.8 percent on a core year-over-year basis.”
JOE SALUZZI, CO-MANAGER OF TRADING AT THEMIS TRADING IN CHATHAM, NEW JERSEY
“I don’t see anything in there that would make me say there’s inflation. The retail sales number is more concerning. The market has been built on a story of economic growth. When I see a number like that it makes me worry about the growth story, the narrative that’s been underpinning the market for the last year. It’s a monthly number. You have to look at trends rather than snapshots but it’s not a good number.”
“I don’t think there’s a story in inflation right now. Those numbers don’t dictate inflation.”
JACK ABLIN, CHIEF INVESTMENT OFFICER, CRESSET WEALTH, CHICAGO CELL
“It sort of feeds on investor fears of an economy running a little hot, that interest rates could rise and put pressure on equities. It’s feeding that fear that the labor market started about 10 days ago.”
“I do think (futures are overreacting). I don’t think the Federal Reserve focuses on CPI.”
“There are really two elements, the obvious one is interest rates, but the derivative concern is we are reaching the end of the business cycle. And if we reach the end of the business cycle that is a different matter, then we are looking at more of a multi-year downturn and one where things roll over. There is a growing sense that you add $1.5 trillion of fiscal stimulus in a market where you have an unemployment rate below 5 percent, that has investors on guard to begin with.”
STOCKS: S&P e-mini futures reversed early gains and were down 1.06 percent
BONDS: U.S. Treasury 2-year and 10-year yields rose, with 10-year last at 2.8730 percent and 2-year at 2.1472 percent
FOREX: The dollar index turned higher and was last up 0.32 percent
RATE FUTURES: Fed funds contract for December 2018 fell
VIX: The Cboe .VIX volatility index turned around early losses and was last at 25.04
Americas Economics and Markets Desk; +1-646 223-6300