January CPI Data Is A Real Test For Stocks And Gold

Key Insights

• Inflation Rate and Core Inflation Rate exceed analyst expectations.
• Markets expect that Fed will not be able to cut rates until June. 
• The changes in Fed policy outlook may put material pressure on major stock indices and precious metals.

On February 13, 2024, U.S. released inflation data for January. The reports indicated that Inflation Rate grew 0.3%, while Core Inflation Rate increased 0.4%. Both reports exceeded analyst expectations.

Inflation data for January may have a significant impact on market dynamics in the upcoming weeks.

Back at the end of 2023, traders prepared for the beginning of the rate cut cycle in March. Later, these expectations were adjusted due to strong economic data, and traders expected that Fed will start cutting rates in May.

Today’s inflation data has dealt a serious blow to rate cut hopes. According to FedWatch Tool, there’s a 63.4% probability that Fed will leave the federal funds rate unchanged at the meeting in May.

Currently, traders do not expect rate cuts until June 2024, which is a major shift in Fed policy outlook compared to previous expectations.

U.S. Dollar Index could be the main beneficiary of the higher-than-expected inflation data. Treasury yields will move higher as bond traders rush out of their long positions which were initiated at a time when markets hoped for robust rate cuts.

Gold has a good chance to settle below the $2000 level. Strong dollar and rising Treasury yields are bearish for gold that pays no interest. It should be noted that rising tensions in the Middle East did not provide sufficient support to gold markets in recent weeks, which means that speculative demand for gold is limited.

SP500 and NASDAQ may face a wave of profit-taking after the rally. Stock traders have enjoyed an incredible rally from October lows. They will have to choose whether they want to stay in their long positions knowing that Fed may not cut rates until June. For some traders, the answer would be ‘no’. At the same time, any positive developments in the AI space may provide additional support to major indices, as hopes for a tech revolution led by AI have served as the key catalyst behind the stock market rally.

For a look at all of today’s economic events, check out our economic calendar.