US CPI Report: Do Stock Markets Need to Worry?

Are stock markets in trouble if US CPI data points the Fed away from bolder interest rate cuts?

• US jobs report sends mixed cues with strong topline results, jarring revisions
• All eyes now turn to US CPI data as markets look for Fed rate cut confidence
• Stock markets are at risk if the central bank seems stuck in a holding pattern

The markets seemed unsure of what to make of January’s US jobs report. At first blush, the numbers appeared to be impressively strong. However, shocking revisions of two years of previous data made for sobering reading. That might make for fireworks at the end of the trading week as all eyes turn to US inflation data for decisive lead.

The Bureau of Labor Statistics (BLS) said 130,000 jobs were added to nonfarm payrolls last month. That’s almost double economists’ consensus forecast of 70,000. What’s more, the unemployment rate unexpectedly ticked down to 4.3%, marking a second consecutive step lower from November’s four-year high of 4.6%.

The US dollar jumped higher while Treasury bonds dropped as yields popped higher on the outcome, implying that traders interpreted the outcome as reducing scope for the Federal Reserve to cut interest rates. However, that first reaction was quick to fade as markets parsed a slew of heavy-duty revisions of prior payrolls releases.

The jobs growth tally was revised from 2 million to 1.5 million for 2024. More jarring still, the already-modest rise of 584,000 jobs for 2025 was slashed to a meager 181,000. That makes the Fed look prescient for having called out labor market weakness as a reason to cut rates last year.

US CPI data in focus after a confusing jobs report

It might similarly look through January’s would-be pickup. After all, Fed Chair Powell has already said that officials are assuming in their policy calculus that there is overcounting in BLS payrolls data. Perhaps then, these numbers are not quite the hawkish motivation that they appeared to be at first blush.

Tellingly, the US dollar pared intraday gains of as much as 0.54% against the euro to just 0.21% by the end of the day. A similar story played out in the bond market. The benchmark 10-year Treasury yield was up as much as 1.57% but trimmed those gains by almost half as traders digested the whole picture, closing up 0.8%.  

For their part, stock markets seemed mystified. The bellwether S&P 500 finished the day flat even as its trading range increased for the first time in three days, pointing to a session marked by seesaw volatility. Incoming inflation data may now take on added significance as traders try to arrive at some kind of resolution.

January’s consumer price index (CPI) report is expected to show that headline price growth cooled to 2.5% year-on-year, an eight-month low. A matching outcome is penciled in for the core CPI measure excluding volatile food and energy prices. That would be the slowest since March 2021, before prices surged following the COVID-19 pandemic.

Markets want inflation data to support Fed rate cut bets

Fed officials are betting that they can cut interest rates again as long as the pace of price growth for services continues to slow. At the same time, the impact of tariffs on goods inflation calculations is set to fade, bringing the central bank’s 2% target into view. Buoyant demand and rising crude oil prices may force a rethink, however.

Leading purchasing managers index (PMI) data from the Institute for Supply Management (ISM) showed service sector activity growth sped up to a 14-month high in December and matched that pace in January. The same data showed price growth sped up for the first time in three months, ostensibly fueled by brisk turnover.

Meanwhile, higher oil prices since the beginning of the year are already fueling inflation fears. Price growth expectations embedded in the bond markets – so-called “breakeven rates” – have been rising in lockstep with the WTI crude contract. On average, it takes about a month for meaningful oil price changes to appear in inflation data.

Energy was the only CPI component that saw disinflation in December. Without this moderating influence, that report CPI would have produced the first price growth pick-up in four months. If January’s data seems similarly flattered, it might become painfully clear how CPI can move in the wrong direction once recent oil price swings are absorbed.

Disappointed selling may strike Wall Street if traders end this week thinking the Fed will default to wait-and-see mode amid a clouded labor market outlook and bubbling inflation risk. Markets already price in a more dovish policy path than Fed officials have owned up to. That gives them room to adjust if realizing such hopes appears less likely.

Ilya Spivak, tastylive head of global macro, has over 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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