Bonds Hit by CPI as Oil Sinks on US-Russia Talks: Markets Wrap

This content was published on February 12, 2025 - 18:09

13 minutes

(Bloomberg) — The world’s biggest bond market got hit as hot inflation data spurred bets the Federal Reserve won’t have much room to cut rates this year. Oil sank as President Donald Trump said he agreed with Russian President Vladimir Putin to begin talks on ending the war in Ukraine.

Treasuries tumbled across the curve, with benchmark 10-year yields soaring the most since the Dec. 18 when hawkish Fed signals rattled trading. Money markets further adjusted bets on Fed rate cuts, now projecting the first – and only reduction in 2025 – in December. Almost every major group in the S&P 500 fell, though the index pared losses amid gains in a few big techs.

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US inflation picked up broadly at the start of the year, with the monthly consumer price index rising in January by the most since August 2023. Speaking with US lawmakers Wednesday, Fed Chair Jerome Powell said the latest data show we’re close, but not there on inflation. He also noted that officials want to keep policy restrictive for now.

“Today’s inflation report will make for very uncomfortable reading for the Fed,” said Seema Shah at Principal Asset Management. “If this persists into the next few months, inflation risks may become too heavily weighted to the upside to permit the Fed to cut rates at all this year.”

Chris Zaccarelli at Northlight Asset Management, although it’s too early to predict that officials will begin raising rates any time soon, the market is going to start seriously considering that the next move the Fed makes – even if it is in late 2025 or early 2026 – is going to be a hike and not a cut.

“The market will likely have a negative knee-jerk reaction to the increasing risks of ‘higher-for-longer’ or even ‘higher-from-here.’ So caution is warranted,” he said.

The S&P 500 fell 0.3%. The Nasdaq 100 was little changed. The Dow Jones Industrial Average slid 0.5%.

The yield on 10-year Treasuries advanced 10 basis points to 4.63%. The Bloomberg Dollar Spot Index wavered.

Wall Street’s Reaction:

Matt Maley at Miller Tabak:

This morning’s higher than expected CPI number (following the higher inflation component of last week’s employment report along with the concerns over tariffs) have taken the yield on the 10-year note back above its trend-line from last September.

If we see any further upside movement as we move through February, it will indeed give us confirmation that long-term yields are going to stay “high for longer” going forward.

This does not mean that they will push above 5% level soon…nor that these yields will not reverse lower at some point later this year. However, it should raise concerns that the Fed will wait quite a bit longer to cut short-term rates than the Street had been thinking until recently…and also raise concerns that Secretary Bessent’s goal of lower long-term yields will take longer to achieve as well.

Ellen Zentner at Morgan Stanley Wealth Management:

Higher-for-longer may have just gotten a little longer. The Fed has been waiting for clear signs that inflation is trending lower again, and this morning they got the opposite. Until that changes, the markets are going to have to remain patient about additional rate cuts.

Aditya Bhave at Bank of America Corp.:

Today’s data increase our conviction that the cutting cycle is over. Hikes remain unlikely, but they seem less inconceivable now.

We appreciate that the political challenges to raising rates could be substantial. But if the Fed doesn’t want to hike, that is yet another reason to not cut any further.

Bret Kenwell at eToro:

Investors were looking for reassurance in this morning’s inflation report — and they didn’t get it. Inflation came in hot across the board, with each major headline figure coming in ahead of consensus expectations.

The immediate reaction to today’s report will likely weigh on stocks in the short term, as a higher-than-expected print further lowers the odds of rate cuts from the Fed this year and stokes investors’ reflationary fears.

Jamie Cox at Harris Financial Group:

Lack of progress on inflation is the story here—this is not the start of a resurgence in inflation.

If these levels of inflation persist, the Fed will be on hold until October. Food and Energy are big players in the hot reads, so there’s a chance we get a little reprieve in the spring.

Mark Hackett at Nationwide:

Today will be a test of investor psychology and commitment to the buy-the-dip instinct, as inflation continues to be a primary tail risk for the Goldilocks narrative. Markets will likely remain in a sideways trading pattern until a catalyst emerges and investor confusion fades, which is unlikely in the near term given the degree of uncertainty.

Larry Tentarelli at Blue Chip Daily Trend Report:

We do not expect any immediate change in Fed policy, but if there is a series of 2-3 above forecast inflation reports, it could put pressure on the Fed to raise rates.

In the near-term we expect higher bond yields and higher volatility in equity markets. Investors should keep a close eye on the 10-year US Treasury yield. Any move closer to or above 4.80% could create negative near-term headwinds for stocks.

We remain bullish on the equity markets for 2025, with a year-end price target for the S&P 500 of 6800, but potential tariffs and/or rising inflation could create headwinds.

Mark Hamrick at Bankrate:

January was hot, hot, hot — for inflation: Looking at the month-over-month, or year-over-year figures on both the headline and core rates of inflation, the Consumer Price Index came in hotter than expected. This marks backtracking for the journey toward lower prices and price stability.”

There’s more inflation and employment data to digest before the next scheduled announcement from the Fed on March 19. It is hard to make the case for a rate cut at this point.

Jim Baird at Plante Moran Financial Advisors:

For now, it’s a “wait and see” approach for Fed chair Jay Powell and his colleagues, who recognize that the case for further easing in the near term has been reduced. Rate hikes don’t appear to be on the table, but a sustained resurgence in inflation could change that.

Josh Jamner at ClearBridge Investments:

The “wait and see” Fed is going to be waiting longer than anticipated after a red-hot January CPI inflation report. Prices jumped more than expected and in a broad-based fashion which is consistent with yesterday’s comments from Chair Powell that the Fed is not “in a hurry” to adjust interest rates. This report puts the final nail in the coffin for the rate cut cycle, which we believe is over.

Today’s hotter print shifts investor expectations for monetary policy, which lends to upward pressure on long-term interest rates and downward pressure on equities. Not all equities are impacted equally, however, with more indebted companies facing headwinds from higher rates while others will ultimately benefit from higher revenues as they are able to charge more for their products. We believe value should outperform growth in such an environment.

Charlie Ripley at Allianz Investment Management:

Today’s data reaffirms Powell’s decision to put rate cuts on the back burner for an extended period of time. Overall, today’s inflation data should force market participants to re-think the Fed’s ability to cut rates this year, especially considering the rise in prices is likely unrelated to any tariff activity from the White House.

Whitney Watson at Goldman Sachs Asset Management:

Today’s stronger than expected CPI release is likely to further cement the FOMC’s cautious approach to easing. A resilient labor market also provides scope for patience. We think the Fed is likely to remain in ‘wait and see mode’ for the time being and anticipate the Fed staying on hold at next month’s meeting.

Richard Flynn at Charles Schwab:

All else equal, hotter inflation would likely keep the Fed from cutting rates sooner, which would in turn result in a stronger dollar. The dollar’s strength could help offset some of the inflationary pressures in the economy and from tariffs. It also makes US Treasuries attractive to hold, helping to mitigate some of the upward pressure on yields.

Michael Brown at Pepperstone:

These figures should see the Fed maintain their patient stance, being in no hurry to deliver another rate cut. Consequently, any rate reductions in the first half of 2025 now seem highly unlikely.

Skyler Weinand at Regan Capital:

With this very strong CPI print, the Federal Reserve is on hold when it comes to interest rates for at least the remainder of 2025. Inflation and inflation expectations are both rising, which is something the Fed needs to counter by keeping rates higher for longer.

The Fed has nothing to do at this point but wait and see, and hope that the economic indicators change to suggest more progress on inflation. If consumer prices or inflation expectations rise any further, it is quite possible that the Fed’s next move is to raise short term interest rates.

Sameer Samana at Wells Fargo Investment Institute:

The hotter than expected CPI confirms investors’ anxiety regarding too-hot inflation that will keep the Fed on the sidelines (as opposed to cutting rates).

We have been concerned about inflation as a risk for some time, and believe that while risk markets can go higher, it will be a choppier trajectory than the last two years.

Investors should use pullbacks to add to U.S. large-cap equities and the energy, financials, industrials, and communication services sectors.

We would also use moves higher on the 10 year treasury towards 4.5-5% to add to lengthen the duration of portfolios and lock in what we believe to be attractive yields.

Peter Graf at Nikko Asset Management Americas:

Today’s uptick in CPI inflation should finally get the market to accept that the US Fed will keep its monetary policy shifter in park, forcing investors to piece together their own narratives on growth and inflation. Unfortunately, the most recent data releases suggest the story could be a tragedy: stubborn inflation is likely to reinforce the disappointing sentiment released on Friday. Combined with earlier service activity weakness, these data also support a more pessimistic reading of the ambiguous January employment report.

Corporate Highlights:

Kraft Heinz Co. said it will discount key items in the coming year while improving products and boosting marketing in order to compete for inflation-weary customers.
DoorDash Inc., the largest food delivery service in the US, issued an outlook for orders in the first quarter that surpassed Wall Street’s expectations, serving as yet another sign that consumer demand remains resilient.
CVS Health Corp. shares climbed the most in more than 25 years after its fourth-quarter results signaled improved performance from the company whose insurance and drugstore units have been struggling.
Spirit Airlines Inc. rejected a refreshed acquisition offer from rival budget carrier Frontier Group Holdings Inc., saying it would instead proceed with a planned restructuring in bankruptcy.
Biogen Inc. forecast a bigger decline in annual sales than Wall Street expected, dimming the drugmaker’s strong finish to 2024.

Key events this week: