The cooling of the U.S. core CPI ignites the market, but analysts say inflation risks remain

According to Zhitong Finance, the U.S. December CPI released on Wednesday was relatively mild. The growth rate of the U.S. December CPI exceeded expectations, but the core CPI growth rate was below expectations. This triggered a significant rebound in the U.S. stock and bond markets, but traders and investors warned that the market may still be concerned about the pace of inflation. Market participants stated that the future path remains influenced by the uncertainty surrounding the Federal Reserve's prospects for further interest rate cuts and the actions of the incoming Trump administration on issues such as taxes and tariffs.

Art Hogan, a market strategist at B. Riley Wealth, stated, "The issues driving interest rates higher and dragging down the stock market still exist. We just don't know whether the tariffs we will see will be surgically precise or broad-based, and we don't know what kind of policy measures we might see in other areas that could lead to inflation or growth."

The yield on the 10-year U.S. Treasury bond recovered from the losses following last Friday's strong employment report, falling back to 4.66%. In December of last year, the Federal Reserve lowered its expectations for interest rate cuts and projected that inflation in 2025 would be stronger than previously anticipated, leading to a significant rise in U.S. Treasury yields in recent weeks.

Steve Sosnick, a market strategist at Interactive Brokers, stated, "This data is slightly better than expected, but as long as there is a bit of good news, traders will be aggressive. This is a number and reaction we must view positively, although it is likely amplified by the negative sentiment we have been grappling with."

Jeff Weniger, head of equity strategy at WisdomTree Inc., a New York asset management firm, mentioned that before the CPI report was released, "there were rumors that we might see interest rate hikes."

However, concerns about the potential impact of Trump's policies on inflation remain troubling. Federal Reserve officials pointed out on Wednesday that uncertainty is increasing in the coming months as they await the initial policies of the new administration, although they indicated that Wednesday's data showed inflation continues to slow.

After the CPI report was released, Rick Rieder, chief investment officer of BlackRock's global fixed income division, stated that progress on inflation "may be slow and uneven, especially due to the significant uncertainty that changes in fiscal policy next year will bring to the economy; for example, changes in tariffs and trade regimes could indeed push up core goods inflation for a period of time."

As the market continues to rely on data, volatility may become more prevalent. Kevin Flanagan, head of fixed income strategy at WisdomTree, expects that daily fluctuations of 10 to 15 basis points in the 10-year U.S. Treasury bond may become the new normal. Following the data release, interest rate futures traders still expect the Federal Reserve to wait until June to cut rates. However, they now anticipate a 50% chance of a second rate cut by the end of the year. In contrast, prior to the report's release, the market only reflected bets on a single rate cut in 2025.

Tina Adatia, head of fixed income client portfolio management at Goldman Sachs Asset Management, stated in a report to clients that the CPI data reinforces the case for further rate cuts, but "the Federal Reserve still has room for patience." Adatia added, "More good inflation data is needed before the Federal Reserve will further ease policy." ”