Brief Relief for Markets After Tame US Inflation

Investors breathed a sigh of relief on Wednesday as the U.S. consumer price index (CPI) for December 2024 came in softer than expected, providing a brief respite from inflation-related anxieties. The core CPI, which excludes food and energy, rose 3.2% year-over-year, below the 3.3% consensus estimate. This was the first time since November 2022 that the core CPI did not rise by 3.3% or more on a year-over-year basis.



The soft inflation reading lifted investor sentiment, boosting stock prices and dragging Treasury yields lower. The S&P 500 index gained 1.8%, while the Dow Jones Industrial Average rallied 703 points, or 1.7%. The Nasdaq composite leaped 2.5%. Meanwhile, the 10-year Treasury yield fell to 4.65% from 4.79% late Tuesday, reflecting growing hopes for future interest rate cuts by the Federal Reserve.



Strong earnings from U.S. banks also contributed to the market rally. Wells Fargo, Citigroup, and Goldman Sachs all reported stronger profits for the last three months of 2024 than analysts expected, with Wells Fargo jumping 6.7%, Citigroup rallying 6.5%, and Goldman Sachs gaining 6%. These positive earnings results helped launch indexes to their best day in two months, indicating that investors were encouraged by the positive financial performance of these companies.

However, the relief rally may be short-lived, as U.S. inflation still looks a bit too warm for comfort. The annual rate of 3.2% is still above the Federal Reserve's target of 2%, and investors are concerned about the potential for upward pressure on inflation if the incoming Trump administration pursues aggressive policies on tariffs and taxes. Additionally, the yen's surge following Bank of Japan Governor Kazuo Ueda's comments on a potential rate hike in January added to market volatility, with the Japanese currency appreciating against the U.S. dollar and other major currencies.

In conclusion, the soft U.S. core inflation figure for December 2024 provided a brief respite for investors, boosting stock prices and lowering Treasury yields. However, the relief rally may be short-lived, as investors remain concerned about the potential for higher inflation and the impact of the incoming Trump administration's policies on the economy and markets. As always, investors should stay vigilant and monitor the latest developments in the global economy and financial markets.