US consumer prices rose 0.2% on Tuesday in line with estimates and are bound to soothe rattled equities markets. Investors were concerned increased inflation could accelerate the pace of Federal Reserve interest-rate rises this year. February data is likely to put that concern on pause.
Investors are analysing every sign in order to make sense of a market that has become much more unruly since the early part of 2018. The latest Labor Department figures show the CPI excluding volatile food and energy prices was up 0.2% in February and annualised figure of 1.8% was unchanged from the previous month.
January CPI data saw its biggest gain in four years and rose 0.5%. A gain that precipated fears of rising inflation and a stock market correction with the Dow and S&P 500 plunging by more than 10%.
It appeared to be a significant sign that the relatively placid era for equities was changing and analysts have predicted continuing turbulence in the near future.
Ahead of US policy makers’ two-day meeting on 21 March, investors are trying to read the runes and are reassessing the likelihood that the interest-rate environment that helped to spur the bull run is undergoing a sea change.
Back in December, the Fed projected three quarter-percentage rate rises this year and some market experts say that an aggressive rise in inflation could see the central bank raise rates at least four times.
Rising inflation could prove pivotal for investors as a drop in Treasury prices render government bonds an attractive option. Bears are looking more in the ascendant as fixed income becomes more competitive relative to equities according to economists.
Good news bulls
However, recently released February jobs report data proved a fillip for US stocks with unemployment remaining at a 17-year low. Even as employment ramped up, wage growth was subdued.
Further, January figures were also revised lower allaying fears that rising wages could drive inflation up sharply forcing the Fed to raise interest rates more aggressively.
Some investors also don't see inflation as a cause of great concern at the moment as more positive developments take over the news cycle and expectations are that stocks will continue to rise albeit more moderately.
The global economic expansion story is still delivering dividends to the bull market. The US stock market rose at the open on Tuesday and at the time of publishing, the Dow was up 0.55% to 25,313.96 and the S&P 500 was up 0.39% to 2,793.97.
The Trump administration’s bombshell delivery of trade tariffs roiled markets but scheduled trade talks between the US and its European allies suggest a work around may be possible and is seen as a positive development.
Bad news bears
Geopolitical realities and inflation rate worries may subside for now but investors are dealing with a double-edged sword as they navigate a changing economic scenario and how global central banks are likely to respond.
Analysts say the strength of economic growth may force central banks to rein in growth to avoid overheating raising interest rates as a result, but economic conditions could equally mean they pull back.
Add to the mix how corporates react to this changing environment underscoring likely volatility in equities markets. The effects of tax stimulus mean companies are ploughing money into increased capital spending rather than the trend for companies to buy back their stock.
The New York Times reported that Goldman Sachs analysts "noted that corporations themselves represent the single largest source of demand for stocks in the United States."
Investors will find assessing market conditions the usual tricky science, but today's CPI figures is a cog in the wheel for holding the status quo for now.