The latest CPI has not stirred up waves? The market's "number one concern" may have changed

Despite the consumer price index (CPI) data released on Wednesday aligning with Wall Street's expectations, investors are increasingly concerned about inflation. All eyes are on the CPI data, while investors are also considering the potential impact of fiscal policies during Trump's second term on inflation.

Diana Iovanel, a senior market economist at Capital Economics, stated in a report on Wednesday, “Although investors seem indifferent to today’s U.S. inflation news, they appear to be increasingly worried about its long-term outlook.” She noted, “Current inflation does not seem to be a major issue for investors, but since last week’s U.S. election, future inflation has become a primary concern.”

Keith Lerner, Co-Chief Investment Officer and Chief Market Strategist at Truist Advisory Services, said in a phone interview on Wednesday that when U.S. stocks fell during early trading on Wednesday, “the selling pressure was minimal,” as the CPI report “did not change the game.” “This is not surprising.”

According to Dow Jones market data, since the election day on November 5, the Dow Jones Industrial Average closed up 4.1% on Wednesday, the S&P 500 index rose 3.5%, and the Nasdaq index increased by 4.3%.

Lerner stated, the stock market is digesting the significant gains brought about by expectations that the Trump administration's anticipated policies will benefit economic growth. Currently, “the market seems to be more focused on all the positive factors and waiting to understand some potential negative factors.”

For instance, higher tariffs could exacerbate inflation, and investors will closely monitor the tariff levels that the Trump administration may implement. Lerner expects that the market will “begin to address policy-related questions in a more significant way next year.”

Rick Rieder, Chief Investment Officer of Global Fixed Income at BlackRock and head of the Global Allocation Investment Team, stated in an email, “We find ourselves at a juncture where the range of possible outcomes for inflation includes recent strong economic growth, newly elected political officials, and the potential for higher tariffs and higher growth rates, which has led to heightened attention on Wednesday’s CPI report.”

He noted, “The CPI report generated significant expectations and prompted reflection after its release,” as investors may attempt to interpret how the Federal Reserve will respond to the latest inflation data. Rieder pointed out, “But the fact is, the Federal Reserve considers a lot of inflation data, with a greater emphasis on the core personal consumption expenditures (PCE) price index data.”

Meanwhile, the U.S. inflation rate has significantly decreased from its peak in 2022 but remains above the Federal Reserve's 2% target.

Rieder stated, the CPI data indicates that “the core PCE index will also show monthly growth,” reflecting an inflation rate that is far below the levels we have been accustomed to over the past few years, but the inflation trajectory may have also eliminated much of the potential inflation improvement in the goods economy and parts of the service sector. He expects the Federal Reserve may lower the benchmark interest rate again at the December policy meeting, "and then interpret the inflation trajectory from now on."

According to the latest data from the Chicago Mercantile Exchange's FedWatch tool, after the CPI report was released, traders in the federal funds futures market expect an 82.5% chance that the Federal Reserve will lower its benchmark interest rate (currently targeted at a range of 4.5% to 4.75%) by 25 basis points next month.

Lerner stated that the U.S. stock market may continue to rise until the end of the year, supported in the short term by economic resilience, corporate earnings growth, the Federal Reserve's "easing mode," and the recent drop in oil prices.

"Inflation Upside"

Iovanel noted in the report that the "inflation nature" of Trump's proposed agenda may lead to a rise in the recent 10-year U.S. Treasury yield.

Lerner indicated that the policy uncertainty of the next administration and questions about the scale of the U.S. deficit will "reflect in a broader range of fluctuations in the 10-year U.S. Treasury bond. I think, as you see a broader range of daily fluctuations, it is almost inevitable."

Popular ETFs tracking indices that provide broad exposure to the U.S. investment-grade bond market have recently faced pressure from rising yields.

For example, according to FactSet data, the iShares Core U.S. Aggregate Bond ETF (AGG) and the Vanguard Total Bond Market ETF (BND) have both seen declines over the past three months, bringing their total return for the year to date down to 1.5%.

Among actively managed funds, the iShares Flexible Income Active ETF (BINC), led by Rieder, has increased in total return over the past three months, with a year-to-date total return of 5.2%. The fund invests in the global fixed income space.

Rieder stated, "It can be inferred that with a new set of fiscal policy goals and ideas emerging, the market has viewed the inflation upside as a higher probability event. It is hard to refute this market view, but we will also learn more about the upcoming policies in the coming months."