
Wall St Week Ahead: Inflation Report Could Rattle Markets After Bond Yields Climb
Monthly inflation data can have an“outsized presence in the market,” said Marta Norton, chief investment strategist at retirement and wealth services provider Empower.
“If we were to see inflation re-accelerate, that would be concerning to markets,” Norton said.“There's just this kind of pins and needles moment with every inflation print.” Focus turned to the inflation data following the surprisingly strong employment report for December. Payrolls soared by 256,000, well above the 160,000 estimate, while the unemployment rate fell to 4.1 per cent.
The strong jobs growth“has added to the uncertainty about the trend in inflation, as well as the prospects for the Fed to cut interest rates in 2025,” said Sam Stovall, chief investment strategist at CFRA.
The December CPI is expected to show a 0.3 per cent increase on a monthly basis, according to a Reuters poll.
While the Fed was confident enough that inflation had moderated to start cutting interest rates in September, the pace of annual inflation has remained above the Fed's two per cent target. The Fed now projects inflation will rise 2.5 per cent in 2025.
Minutes from the Fed's latest meeting, released on Wednesday, showed officials also worried that Trump's policies on trade and immigration could prolong the effort to bring down inflation. The Fed is widely expected to pause its rate-cutting cycle at its next meeting at the end of the month, but firmer-than-expected CPI data could push back market projections for further easing even later in the year.
Given“looming questions” about fiscal policy and potential tariffs,“if the inflationary picture that we have absent those risks is also moving in the wrong direction, I think that might challenge market expectations,” said Matt Orton, chief market strategist at Raymond James Investment Management.
A hot CPI number also could further lift Treasury yields and have broad fallout. A selloff this week in government bonds around the world, which included 10-year UK gilt yields hitting their highest level since 2008, sent ripples through financial markets. Yields rise when bond prices fall.
Following the jobs data, the benchmark 10-year Treasury yield hit 4.79 per cent, its highest level since November 2023.
Higher yields can pressure stocks in several ways, including raising borrowing costs for consumers and companies. A rise in Treasury yields can improve the attractiveness for lower-risk bonds, increasing investment competition for equities. The CPI data headlines a busy few weeks for markets. Earnings results from major banks such as JPMorgan and Goldman Sachs in the coming week kick off fourth-quarter reports for US companies. S&P 500 company earnings are expected to have climbed nearly 10 per cent in the quarter from a year earlier, according to LSEG IBES.
President-elect Trump will also take office on Jan. 20. Investors are bracing for quick action from his administration in areas such as tariffs on imports from China and other trading partners, as well as stricter controls on immigration. Speculation about Trump's plans is already jostling markets. For example, the dollar fell and European stocks rose after a Washington Post report this week said Trump's aides were exploring tariff plans that would only cover critical imports. Trump denied the report.
“We are still waiting to understand the strength of the bite with Donald Trump's bark,” said Bryant VanCronkhite, senior portfolio manager at Allspring Global Investments.

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