By Machine gun (JO:) Krauskopf
NEW YORK (Reuters) – Next week's U.S. inflation data could test the nerves of stock investors and further inflame concerns about rising Treasury yields and uncertainty about Donald Trump's policy plans.
After back-to-back standout years, the stock market faltered in 2025, with the benchmark index down about 1% so far this year.
A revival in inflation is considered one of the key risks facing stocks, and the Federal Reserve is already withdrawing its projected interest rate cuts because it expects inflation to rise at a faster pace than it had previously anticipated.
Markets pushed back expectations of a next rate cut until June after a spectacular U.S. jobs report on Friday, with stocks falling sharply and Treasury yields hitting new milestones following the December jobs data.
The monthly consumer price index, due to be released on Jan. 15, is among the most closely watched measures of inflation and could spark greater market volatility if it exceeds expectations, investors said.
Monthly inflation data can have a “huge presence in the market,” said Marta Norton, chief investment strategist at wealth and retirement services provider Empower.
“If we saw a further acceleration of inflation, that would be worrying for markets,” Norton said. “There's kind of a tingling moment with every inflation data.”
Attention focused on inflation data following December's surprisingly strong jobs report. Payrolls soared by 256,000, well above the estimate of 160,000, while the unemployment rate fell to 4.1%.
Strong job growth “has added to uncertainty about the trend of inflation, as well as the prospects for the Federal Reserve to cut interest rates in 2025,” said Sam Stovall, chief investment strategist at CFRA.
The December CPI is expected to show a monthly increase of 0.3%, according to a Reuters poll.
While the Federal Reserve was confident enough that inflation had moderated to begin cutting interest rates in September, the pace of annual inflation has remained above the Fed's 2% target. The Federal Reserve now projects that inflation will rise 2.5% in 2025.
Minutes from the Federal Reserve's latest meeting, released Wednesday, showed officials were also concerned that Trump's policies on trade and immigration could prolong efforts to reduce inflation.
The Federal Reserve 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 the “looming questions” about fiscal policy and potential tariffs, “if the inflation outlook that we have without those risks also moves in the wrong direction, I think that could defy market expectations,” said Matt Orton, strategist. market manager raimon (NS:) James Investment Management.
A high CPI number could also push Treasury yields even higher and have wide-ranging consequences. A sell-off this week in government bonds around the world, which included UK 10-year bond yields hitting their highest level since 2008, sent ripples across financial markets. Yields rise when bond prices fall.
Following the jobs data, the benchmark index hit 4.79%, its highest level since November 2023. Higher yields can pressure stocks in several ways, including increasing borrowing costs for consumers and companies. A rise in Treasury yields may improve the attractiveness of lower-risk bonds, increasing investment competition for stocks.
The CPI data headlines a busy few weeks for markets. Earnings results from major banks like JPMorgan and Goldman Sachs in the coming week kick off fourth-quarter reporting for U.S. companies. Profits at S&P 500 companies are expected to have risen almost 10% in the quarter from a year earlier, according to LSEG IBES.
President-elect Trump will also take office on January 20. Investors are bracing for swift action from his administration in areas such as tariffs on imports from China and other trading partners, as well as stricter immigration controls.
Speculation about Trump's plans is already shaking markets. For example, the dollar fell and European stocks rose after a Washington Post report this week said Trump's advisers were exploring tariff plans that would only cover critical imports. Trump denied the report.
“We're still waiting to understand the bite of Donald Trump's bark,” said Bryant VanCronkhite, senior portfolio manager at Allspring Global Investments.
Wall St Week Ahead is held every Friday. To view the daily stock market report, click (.N)
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