Stocks turn down as inflation pressures rise



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U.S. stocks were trading in and out of positive territory Wednesday as traders reacted to signs of firming inflation after a report showed consumer prices in January rose faster than expected.

While the consumer price index, or CPI, isn’t normally a must-see number on Wall Street after years of tame inflation, it is once again on traders’ radar after a report earlier this month showed hourly wage inflation at its highest level since 2009. That sparked fears that inflation — and interest rates — are on the move higher, a trend shift that sparked the market turbulence that has ensued in recent weeks.

Fears of rising inflation was reinforced Wednesday when CPI rose at a faster-than-expected 2.1% annual pace, above the 1.9% Wall Street had forecast.

Rising inflation expectations initially pushed stock prices lower, as investors see it as resulting in higher interest rates.

In late morning trading, the Dow Jones industrial average, which has risen three straight sessions after a massive selloff last week briefly pulled it down more than 10% from its peak, had reversed an earlier loss of 150 points and was up 35 points, or 0.1%.

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“Today’s CPI confirms that inflation is trending higher,” says Charlie Ripley, senior investment strategist at Allianz Investment Management in Minneapolis. “The big picture story is that inflation, which pretty much flatlined for a while, is moving moving back up.”

Stronger inflation readings will likely cause interest rates to move higher. And that was the case Wednesday when the yield on the 10-year Treasury note rose as high as 2.882% before settling back to 2.875%. While the 10-year note is at its highest level since January 2014, today’s high yield did not exceed its recent peak of 2.896% on Feb. 12.

The key level to watch is 3% on the 10-year government bond, as that is a key area that could create added pressure on stocks, adds Ripley. 

“Psychologically, 3% is a big number,” says Ripley, adding that if inflationary pressures continue to build the Federal Reserve may have to hike short-term interest rates this year more than the three times they have signaled in a move to cool off an overheated economy. Higher borrowing costs slow economic growth.

The market’s muted reaction to today’s stronger-than-expected CPI could be due to the fact that the spike wasn’t massive, and also came on a day when January retail sales came in weaker than expected, said Mike Loewengart, VP of investment strategy at E-Trade. 

Both factors, he suggests, means the Fed may not need to get overly aggressive with rate hikes.

“Cooler heads will tell you the potential for an accelerated rate hike agenda from the Fed still looks unlikely,” says Loewengart.

For now, stock investors are focusing on market positives, such as a strong U.S. economy, a solid labor market and growth in most economies around the world, says Ripley.

For now, “the rising inflation expectations shouldn’t be considered something to panic about,” Ripley adds.

The next key inflation data point to watch is the producer price index, or PPI, set for release Thursday. The PPI measures wholesale price pressures in the economy.




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