Inflation Still Simmers: CPI Surged in January, Spiking Yields and Raising New Questions About Fed Policy Path

January's CPI came in hotter than expected, sending Treasury yields spiking to two-month highs and pushing major indexes sharply lower. Higher shelter and restaurant costs continue to burden the Fed as it tries to push inflation down, and now its policy path faces new questions.
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Key Takeaways

  • Inflation pops in January as CPI report higher than expected, sending yields spiking

  • Small caps show some life as Russell 2000 outpaced SPX Monday

  • Crude oil futures knocking on door of resistance near 200-day moving average

(Tuesday market open) Treasury yields soared and stocks sagged early Tuesday after January’s Consumer Price Index (CPI) report showed inflation hanging in thanks partly to high housing costs. Early market reaction suggests investors might have to wait longer for potential rate cuts.

Headline CPI rose 0.3% and core CPI, stripping out food and energy, climbed 0.4% last month. Analysts had forecast 0.2% and 0.3%. The report raises new questions about whether the Federal Reserve has fully snuffed out price pressure. Rate cut chances for May dropped sharply in the wake of the data.

On an annual basis, CPI rose 3.1% in January, down from 3.4% in December but above 2.9% expectations. Core rose 3.9%, the same as in December, after analysts had predicted a slide to 3.7%.

“CPI surprised to the upside mostly due to housing costs,” said Cooper Howard, a director of fixed income strategy at the Schwab Center for Financial Research. “Inflation is moving in the right direction but not as quickly as the market would like. Treasury yields spiked higher following the release while the timing of the first rate cut was pushed out further.”

January’s jump reflected rising costs of shelter and food away from home, as well as higher medical costs, the government said. Energy prices fell thanks to lower gasoline costs, while used car and apparel prices also dropped.

The 10-year Treasury note yield lifted off after the report, reaching nearly 4.3% ahead of the opening bell. Today’s 4.295% peak represented the highest level since early December. Yields had been below 3.85% earlier this month, so they’ve made a dramatic move in just the last two weeks and could weigh on small caps and interest rate-sensitive sectors.

While today’s data raised immediate red flags, it’s just one report. There’s plenty of data to shape thinking by mid-March when the Fed next meets, Before then, policy makers will also mull the January Producer Price Index (PPI), January Personal Consumption Expenditure (PCE) prices (the Fed’s favored inflation meter), February’s jobs report, and February CPI and PPI.

Futures based on the S&P 500® index (SPX %) dropped 1.12% shortly before the close of overnight trading. Futures based on the Dow Jones Industrial Average® ($DJI) fell 0.83%, and futures based on the Nasdaq-100® (NDX) fell 0.44%.

Morning rush

  • The 10-year U.S. Treasury Yield (TNX) jumped 12 basis points to 4.28% after CPI.
  • The U.S. Dollar Index ($DXY) spiked to 104.73 after CPI, a new high for the year.
  • The Cboe Volatility Index® (VIX) rose to 14.48, near its February high.
  • WTI Crude Oil (/CL) climbed 0.75% to $77.50.

Just in

Price pop: The sharper-than-expected January CPI had an immediate impact on rate cut probabilities. There’s now just a 5% chance of March trim, down from 15% yesterday, while chances of rates being lower after the Fed’s May meeting are now around 40%, down from 60% yesterday. Fed speakers had already indicated before CPI that they’re not ready to make a move next month.

For more depth on how to interpret today’s report, this handy Schwab video explains how to track inflation using CPI and other indexes.

And beyond: While U.S. inflation is in the driver’s seat today, interest rates around the world sometimes move in sync. That means investors might want to follow global inflation trends, too.

“Inflation globally will likely continue to moderate, but not necessarily in a straight line,” said Michelle Gibley, director of international research at the Schwab Center for Financial Research. “Inflation ticked higher globally in December, and continued into January in the U.K., while inflation eased in the Eurozone and Japan last month. This week brings jobs data from Australia, the Eurozone and the U.K.”

What to watch

Additional U.S. reports this week include retail sales, building permits, housing starts, consumer sentiment, and industrial production, with PPI also in the mix. See more below.

At the same time, it’s quiet in China, where markets are closed all week for the Lunar New Year holiday.

Stocks in spotlight

The drumbeat about narrow market breadth still echoes, but there’s been improvement on that front. Small caps quietly began rallying late last week and continued to Monday, outpacing their larger counterparts. It’s way too early to call this a trend, but bulls would likely welcome any sign of investor interest expanding beyond the familiar mega-cap tech names and into less-capitalized regions like the small-cap Russell 2000® (RUT) index.

“We’ve had some breadth improvement, and the Russell 2000 has been the biggest beneficiary, with 55% of stocks in the RUT now above their 50-day moving average versus 37% last week,” said Joe Mazzola, director, trading and education, at Schwab. “The gains we’ve seen in the Russell the last three days have been constructive.” The index is now slightly positive for the year.

While small caps led the way Monday with nearly 2% gains, tech and communication services stocks took a back seat and sectors like utilities, energy, and staples finished near the top of the leader board as Treasury yields eased.

Tech stocks, especially within the AI and semiconductor space, are skating a bit ahead of the puck from a technical perspective, opening them up to potential profit taking. Other sectors could gain ground if investors shift their focus, but that could also mean lighter gains or possible losses for the major indexes, which are heavily weighted toward the mega caps.

Yesterday showed how profit taking in the mega caps can mask underlying strength in the market. Advancers led decliners by a 7-to-2 ratio at the New York Stock Exchange (NYSE) but the SPX fell slightly, hurt by weakness in trillion-dollar names like Microsoft (MSFT) and Amazon (AMZN).

Technically challenging conditions in tech might be an opening for volatility to pick up, and in fact the VIX jumped nearly 8% on Monday and climbed again early Tuesday. Rising volatility often indicates increased chances of sharper daily market moves. Fixed income volatility has already climbed.

On tap: Earnings season may be past peak, but there’s plenty ahead. Weekly highlights include Coca-Cola (KO), Biogen (BIIB), Airbnb (ABNB), and Lyft (LYFT) today, followed later this week by Cisco (CSCO), Roku (ROKU), Applied Materials (AMAT), and Deere (DE), among many others. More than 60 S&P 500 companies, including two $DJI members, step up to the line this week. Big box retail takes the stage starting a week from today with Walmart (WMT) and Home Depot (HD).

Coca-Cola earnings didn’t give shares much fizz in premarket trading. They’re up, but only a smidgen after revenue beat Wall Street analysts’ estimates and earnings per share met expectations. Guidance was in line with Wall Street’s thinking, with organic revenue growth of 6% to 7% forecast for fiscal 2024. That’s down from 12% in fiscal 2023. Organic growth excludes divestitures, acquisitions, and foreign exchange.

In the most recent quarter, revenue rose more than product volume, which reflects higher prices. It’s unclear how much pricing power consumer companies have in early 2024 as shoppers appear to be exhausted after several years of inflation. However, Coca-Cola has successfully passed along higher prices for a while.

Lyft and Airbnb report after the close followed by Cisco tomorrow.

Stocks on the move early Tuesday include:

  • JetBlue (JBLU) spiked 15% after activist investor Carl Icahn said he has a nearly 10% stake in shares of the airline.
  • Shares of Biogen slipped 4.5% after the pharmaceutical company’s earnings per share (EPS) and revenue for the quarter both came up short of Wall Street’s expectations.
  • Shares of Tripadvisor (TRIP) jumped 12% after the travel-services platform said it had formed a special committee to consider “any proposals that may be brought forward for a potential transaction.”

Eye on the Fed

Early today, futures trading pegged chances at 5.5% for the FOMC cutting rates by 25 basis points following the March 19–20 meeting, according to the CME FedWatch Tool. The market prices in around a 40% chance the funds rate will be lower than now after the Fed’s May meeting.

CHART OF THE DAY: ALMOST AND NOT QUITE. The Nasdaq Composite ($COMP-purple line) came within a whisker of its late 2021 all-time high close and intraday peak last week, but isn’t quite there. Meanwhile, the small-cap Russell 2000 (RUT-candlesticks) remains well below its late 2021 record high. Data sources: FTSE Russell, Nasdaq.  Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Small cap revival? It may be too early to celebrate, but the Russell 2000 index of small-cap stocks is marching upward despite a recent stumble by the financials sector, which is heavily represented in the RUT. Don’t discount the impact of other sectors because RUT isn’t quite as much a “regional banks and lots of other stuff” index these days. Industrials stocks now have the highest industry weighting of any sector in the RUT at more than 18%, according to the London Stock Exchange Group (LSEG). Financials hold second at just under 16%, but health care is breathing down financials’ neck at 15.3%. Technology, which helped the SPX gain pounds last year while RUT barely moved the needle, now represents about 13% of the RUT. Server and storage solutions company Super Micro Computer (SMCI) is one of the top-10 RUT constituents, along with three other tech firms. In fact, there isn’t a financial company in the top 10, with tech, industrials, and consumer discretionary dominating. On the charts, RUT remains nearly 17% below its late 2021 peak that topped 2,400, but it’s back above 2,000 for the moment. A key area to watch could be the late-December high of 2,071, which it hasn’t pierced since April 2022.

The other side: From a U.S. data standpoint, early 2024 has been one happy surprise after another. Name the number and it likely exceeded Wall Street’s expectations, whether it’s jobs, gross domestic product, consumer sentiment, home sales, or corporate earnings. Change may be afoot, though it’s unlikely to cause too much rethinking by the Fed after the central bank pushed back possible rate cuts due in part to all this resilience. This week’s January Retail Sales, due Thursday, is seen falling monthly as a burst of mid-January chill apparently sapped buying interest. The headline number is expected to fall 0.2%, said Weekly Initial Jobless Claims, while still historically low, popped slightly in recent weeks and could top 220,000 in Thursday’s report after dipping below 200,000 at one point in January, said. Housing Starts and Building Permits due later this week also look like they could be flat to a bit lower. The economy has performed far better than central bankers had expected in the face of 500 basis points in rate hikes over the last two years, and nothing out there suggests an imminent halt. Still, anyone who hopes to see a bit of cooling might take comfort in some of the coming numbers. Unless they surprise again.

Super Bowl and groundhogs: It’s common but inaccurate folklore that Super Bowl results and the groundhog’s shadow affect stocks. So far in 2024, these factors are mostly in the “loss” column, but several metrics more closely tied to the actual economy might be better guides. Learn about them in the latest post from Jeffrey Kleintop, chief global investment strategist at Schwab.


February 14: Expected earnings from Occidental Petroleum (OXY), Kraft Heinz (KHC), and Cisco (CSCO).

February 15: January Retail Sales, January Capacity Utilization, January Industrial Production and expected earnings from Deere (DE), Applied Materials (AMAT), and Roku (ROKU).

February 16: January Housing Starts, January Building Permits, January PPI and Core PPI, University of Michigan February Preliminary Consumer Sentiment.

February 19: U.S. markets closed for President’s Day holiday.

February 20: Expected earnings from Medtronic (MDT), Walmart (WMT), Home Depot (HD), and Toll Brothers (TOL).

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

Charles Schwab & Co., Inc. (“Schwab”) and TD Ameritrade, Inc., members SIPC are separate but affiliated subsidiaries of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank.


Key Takeaways

  • Inflation pops in January as CPI report higher than expected, sending yields spiking

  • Small caps show some life as Russell 2000 outpaced SPX Monday

  • Crude oil futures knocking on door of resistance near 200-day moving average

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