The U.S. Consumer Price Index (CPI) for January came in hotter than expected, marking the fourth consecutive year of a stronger-than-anticipated January inflation report. This unexpected jump complicates the Federal Reserve’s path toward achieving its 2% inflation target and has led to a reduction in market expectations for rate cuts this year.
Key Data Points:
- Headline CPI: +3.0% y/y (vs. +2.9% expected), up from +2.9% prior.
- m/m: +0.5% (vs. +0.3% expected), unrounded at +0.467%.
- Core CPI (Excluding Food & Energy): +3.3% y/y (vs. +3.1% expected).
- m/m: +0.4% (vs. +0.3% expected), unrounded at +0.446% (vs. prior +0.225%).
- Real Weekly Earnings: -0.3% (vs. -0.1% prior).
- Core Services Ex-Shelter: +0.757%.
- Core CPI Services Ex-Rent/OER: +0.5%.
- Services Ex-Energy: +0.5%.
A major driver of the increase was motor vehicle insurance, which surged 2.2% in January and is now up 11.8% over the past year. Some analysts suggest factors such as California wildfires impacting shelter costs and companies preemptively raising prices ahead of potential tariffs may have contributed to the stronger reading. However, unless inflation reverses quickly, the Fed is likely to remain on the sidelines for an extended period.
Market expectations for rate cuts in 2025 dropped significantly after the report, with pricing now reflecting only 31 basis points of expected easing, down from 40 basis points before the report. Given the +0.4% core and +0.5% headline inflation readings, achieving 2% inflation this year looks increasingly difficult.
In other fundamental news, for the 2nd day in a row, Fed Chair Powell testified on Capitol Hill. This time he was in front of House members. Bucketing his comments into topics below are some of his major views expressed:
Federal Reserve Policy & Independence
Federal Reserve Chair Jerome Powell reaffirmed the central bank’s independence, stating that the Fed has had no contact with the Department of the Treasury (DOGE) and that it strictly controls access to its payment systems. He also reiterated that he would not resign if asked by former President Trump and emphasized a careful approach to monetary policy rules.
Inflation & Monetary Policy
Powell acknowledged that the latest inflation data shows progress but indicated that “we are close but not there yet.” While the recent CPI report suggests inflation may not be moving in the right direction, he downplayed concerns, emphasizing that the Fed still intends to keep policy restrictive. He noted that the Fed’s primary inflation target is PCE inflation, and updated readings will be available after the PPI data release. Powell also stressed that the Fed’s dot plot should not be seen as forward guidance.
Labor Market & Economic Strength
Powell highlighted that the economy remains strong, allowing the Fed to wait for further inflation progress. He noted that labor supply from immigration declined sharply in the second half of last year and is expected to continue falling. Recent jobs reports have shown strong job creation, potentially gaining momentum toward the end of the year. Powell also mentioned the need to monitor supply and demand imbalances in the labor market.
Fiscal Policy & Government Spending
Powell commented on fiscal policy, stating that if DOGE were to cut $1 trillion in spending, it would be difficult to determine the exact economic impact. He emphasized that the Fed’s primary role remains achieving price stability and maximum employment, rather than influencing fiscal decisions.
Housing & Commercial Real Estate
On housing, Powell noted that while there has been clear progress in reducing inflation in housing services, the job is not yet complete. Regarding commercial real estate, he acknowledged that the sector faces significant embedded losses but observed that conditions are not worsening.
Market Expectations & Interest Rates
Powell pointed out that markets are not pricing in higher inflation but may be accounting for the risk of it. He also noted that the recent increase in long-term interest rates is primarily driven by factors unrelated to inflation or Fed policy.
IN the US stock market, the major indices fell sharply near the start of trading but as the day went on and traders digested the news, Fed’s Powell was not an alarmist and there were overtures for peace in the Ukraine/Russia war, the declines were chipped away (at least in the S&P and the Nasdaq).
At session lows,
- Dow was down -489 points
- S&P was down -65.50 points
- Nasdaq was down -228.37 points
At the close, the Dow and S&P still closed lower but the Nasdaq did close positive on the day. The final numbers are showing:
- Dow industrial average -225.03 points or -0.50% at 44368.62.
- S&P index -16.56 points or -0.27% at 6051.94.
- NASDAQ index rose 6.09 points or 0.03% at 19649.95.
The small-cap Russell 2000 was the worst performer with a decline of -19.81 points or -0.87% at 2255.88.
Worth mentioning is shares of Meta closed higher for the 18th consecutive day. This 18-day streak surpasses Meta’s previous record of 11 consecutive days of gains in September 2015 and sets a new benchmark among the “Magnificent Seven” tech stocks. Shares closed higher by $5.50 or 0.76%
The US yields could not get over the CPI data with yields up 7 to 11 pips across the curve:
- 2-year yield 4.361%, +7.1 basis points
- 5 year yield 4.474%, +10.5 basis points
- 10 year yield 4.631%, +9.4 basis points
- 30 year yield 4.833%, was a .4 basis points
The USD is ending the day mixed with gains vs the JPY, AUD, NZD, declines vs the EUR, and unchanged vs the GBP, CHF and CAD. .
The biggest mover was the USDJPY (+1.26%) which got an Asian Pacific boost from less hawkish comments from BOJ Ueda and a technical break back above the 100/200 day MAs at 152.72 (200 day MA) and 152.889 (100 day MA).
Subsequent breaks above the 200 hour MA at 153.17, the 38.2% at 153.959 helped lead the way for a final stretch up to the low of a key swing area target area between 154.77 to 154.96. Within that range also sits the key 50% of the 2025 trading range at 154.897.
The price has seen modest corrective action into the close but at 154.41, the pair is still up 1.27% and it would probably take a move below 154.00 (well 153.959) for the sellers to declare more control. Watch that level for a shift in the new day.
The EURUSD fell sharply on the CPI data, and reached below the 100 and 200 hour MAs at 1.0344 (converged). The low reached 1.0316.
The subsequent rally took the price back higher, and through a swing area between 1.0371 and 1.0381 and the European morning session high at 1.0384. The price spiked above the 50% of the range since 2022 at 1.0405 and all the way up to 1.0429 before rotating lower..
The corrective low off the high stayed above a swing area between 1.0371 to 1.03814. That area will be close support in the new trading day. On the topside a move back above 1.0405 (50% of the range since 2022) would increase the bullish bias for the pair after a VERY volatile trading day.
The GBPUSD is closing the day near unchanged on the day, after a spike lower that took the price to the 38.2% of the move-up from the January low at 1.2377. The move higher broke back above the 100 and 200 hour MA (blue and green lines on the chart below), before running to new highs and into a swing area above between 1.2474 and 1.2500. That area needs to be broken in the new day to increase the bullish bias in the new trading day.
Support is not at the 100/200 hour MAs at 1.2412 to 1.2420.
A look at other markets as the day comes to a close shows:
- Crude oil fell sharply on hopes for peace and Russian oil. The price is down $1.98 or -2.7% at $71.34
- Silver is up $0.40 or 1.24% at $32.22
- Gold is the $2.70 or 0.09% at $2890.92
- Bitcoin is trading of $1400 at $97,192
Tomorrow in the US session, PPI data will be released at 8:30 AM ET with expectations of +0.3% for the headline and the core measure. The number crunchers will be forecasting the PCE data from the combination of the CPI and PPI numbers.
Before that, Swiss CPI will be released with expectations -0.1%. Swiss inflation is low their target level keeping the SNB in play for further cuts.
UK GDP is expected to show -0.1% for the quarter
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