Major U.S. stock indexes reacted positively to the improvement in Core Consumer Price Index (CPI) inflation data last week. Now, traders and investors look forward to this holiday-shortened trading week featuring the inauguration. Time for a quick update!
Tallying the week ending 01/17/25, the S&P 500 rose by 2.91%, the Nasdaq 100 climbed by 2.85%, and the Dow Jones Industrial Average increased by 3.69%.
Major U.S. Equity Indexes
Major U.S. stock indexes were higher last week as they clawed back at the previous week’s declines, courtesy of bank earnings and improving Core CPI inflation data. Bond yields took a breather after their recent run higher.
Bank earnings were strong from several large players, showing earnings per share growth, with investment banking and trading activity alive and well.
Inflation Improvement
Markets needed a jolt after the previous week, and they got just that in the form of some tame inflation data.
Producer Price Index (PPI): First on the docket with a Wednesday data release, PPI data showed December pricing coming in less than expected, with a 0.2% monthly rise versus forecasts for 0.4%! This print puts PPI running at a 3.3% annual rate.
Adding to the PPI headline number was a light reading in Core PPI, which excludes volatile food and energy from the metric. Core PPI was unchanged in December, below expectations for a 0.3% monthly rise — also very nice. This reading makes it a 3.5% year-over-year rise.
Core PPI is widely watched by central bankers to gauge price stability. A miss of 3 ticks below expectations set the tone heading into the big CPI data reading the following day.
Consumer Price Index: Headline December Consumer Price Index data showed a monthly increase of 0.4% (a tick higher than expectations), equaling a 2.9% year-over-year inflation rate, up from 2.7% in November.
Energy, food, new and used vehicles, car insurance, and airline fares contributed to the increase. Although that might not sound good initially, there was positive market-moving data beneath the surface.
Core CPI, which excludes food and energy, came in below expectations, tacking on 0.2% for the month, a tick below expectations for 0.3%. Overall, the metric was running at a 3.2% annual pace, and markets loved it.
Widely watched shelter pricing, which showed some slight improvement in a previous reading, also pleased stock market bulls. For December, shelter prices rose by 0.3% monthly and saw an annual increase of 4.6% year over year — the smallest one-year gain since January 2022.
That was three years ago, and housing is one of the most stubborn segments in the inflationary saga. Markets loved to see it!
PPI, CPI Market Reaction
The PPI data release on Tuesday was cheered by traders and investors ahead of the NY stock market opening bell, as the S&P 500 rallied early. The early gains, however, were short-lived, as the S&P 500 could not maintain its gains for the session and finished slightly lower. The uncertainty surrounding the upcoming CPI data seemed to cause some anticipatory nerves.
However, those nervous feelings before the CPI data release were eased significantly after the data release on Wednesday, with major U.S. stock indexes posting substantial gains. The S&P 500 erased its losses for 2025 on this day, setting the tone for the rest of the week.
Why such a big move to the upside? At first glance, the CPI data may not have seemed to warrant such a big move. But algorithms moved fast and perhaps smelled some improvement in shelter pricing and core CPI pricing. In addition, market sentiment was perhaps a bit overstretched to the downside following the previous week’s payroll data and the big move in bond yields.
The CPI data seemed to reinvigorate (some) optimism about a 2025 rate-cutting Fed (at least for now).
Government Bonds & Fed
As major stock indexes rallied on inflation data last week, government bond yields fell in a much-needed pullback after the recent rise.
10-year note yields fell around 16 and a half basis points, finishing the week near 4.609%. Dovish-sounding comments from Federal Reserve Governor Christopher Waller did not hurt either!
Probabilities show a 97.9% chance of the Fed leaving rates unchanged at the January meeting, according to the CME FedWatch tool. However, March probabilities indicate a 27.0% chance of a quarter-point cut at the March meeting as of the market close on 01/17.
It felt like the bond vigilantes were away from the office during CPI week and the days leading up to the inauguration. Could the higher interest rate fear based on policy uncertainty have reached an extreme level, and cooler heads have come to prevail? It is too early to tell!
December Retail Sales Miss, Upward Revision
CPI had the bulls roaring, and December retail sales showed that the U.S. economy ended the year on solid footing.
While missing the 0.6% monthly growth estimate, December data showed a 0.4% gain, and November data was revised higher by 0.1% to a 0.8% gain. Strength was evident in car sales and furniture purchases.
So, December retail sales growth was lower than November and missed expectations, but combined with an upward revision to November data, markets liked it. Some outlets perceived it as excellent, yet other opinions exist.
The Takeaway
CPI and PPI data were the keys to last week’s rally across major U.S. stock indexes. Dovish Fed member commentary always helps things along. The positive inflation data was welcomed, easing the overly bearish sentiment from last week driven by rising bond yields.
Had the fear of higher rates amid the new administration policy uncertainty gotten too extreme heading into last week? Time will tell. During this holiday-shortened trading week for MLK Day, the new presidential administration begins.
This week is quiet for economic data releases, although we will get the weekly unemployment data and some flash manufacturing and services data. Markets will further digest last week’s key data in this short week. Let’s see how things shape up from there.
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