Wall Street got a reality check on Tuesday, with hotter-than-estimated inflation data triggering a slide in both stocks and bonds. 

Equities pushed away from their all-time highs as the consumer price index topped estimates across the board. Treasuries sold off, with two-year yields hitting the highest since before the December central bank “pivot.” Swap traders ratcheted down their expectations for a Fed cut before July. The stock market’s “fear gauge” — the VIX — surged the most since October. And a measure of perceived risk in the U.S. investment-grade corporate bond market soared — with three issuers getting sidelined.

“It is too early to declare victory over inflation,” said Torsten Slok at Apollo Global Management. “Maybe the ‘last mile’ was indeed more difficult.”

The CPI data came as a disappointment for investors after a recent downdraft in price pressures that helped build expectations for rate cuts this year. The numbers also gave credence to the wait-and-see approach highlighted by Jerome Powell and a chorus of Fed speakers.

The S&P 500 fell 1.4 per cent, dropping below 5,000 in its worst CPI day since September 2022. Rate-sensitive shares like homebuilders and banks sank, while Tesla Inc. led losses in megacaps. The Russell 2000 of small caps slumped about 4 per cent. U.S. 10-year yields climbed 14 basis points to 4.31 per cent. The so-called real yield hit 2 per cent. The dollar rose, driving gold under US$2,000.

“If Powell and other Fed members hadn’t already thrown cold water on the prospects for a March rate cut a few weeks ago, today’s CPI report might have done that,” said Jason Pride at Glenmede. “Evidence of still-sticky services inflation is likely to give the Fed pause before cutting rates too quickly.”

Pride says rate cuts are likely still on the table for this year, but they may begin later than the market may be anticipating.

Swap contracts referencing Fed policy meetings — which as recently as mid-January fully priced in a rate cut in May and 175 basis points of easing by the end of the year — were roiled. The odds of a May cut dropped to about 32 per cent from about 64 per cent before the inflation data, with fewer than 90 basis points anticipated this year.

“While the door for a March cut had already been effectively shut given the recent Fed commentary and the jobs reports, the Fed has now locked the door and lost the key,” said Greg Wilensky at Janus Henderson Investors.

Much of the unanticipated increase in CPI was concentrated in what looks like a “noisy jump” in Owners’ Equivalent Rent (OER) — a shelter price indicator, according to Tiffany Wilding at Pacific Investment Management Co. While that will likely revert, the details were consistent with the Fed having a “last mile problem” — and not cutting rates until midyear or later, she added.

The January CPI report is a reminder that inflation is a difficult, not-well-understood problem that doesn’t move in a straight line, according to Chris Zaccarelli at Independent Advisor Alliance.

“Bonds are too expensive if inflation is still a problem and the stock market can’t keep rallying if rates are going to be higher-for-longer – especially if the assumption that the Fed is completely done raising rates is incorrect,” he added.

Andrew Brenner at NatAlliance Securities expects more volatility for the rest of the week “as the bears have the upper hand and the bulls are grasping.”

To Jeffrey Roach at LPL Financial, while the data wasn’t exactly what the Fed wanted to see, investors will have to wait until later this month for a more comprehensive look at consumer prices.

“Just as the Fed said it wouldn’t rush to cut rates even after several months of encouraging economic data, they’re not going to immediately reverse course just because of one hotter-than-expected CPI reading,” said Chris Larkin at E*Trade from Morgan Stanley. “Until proven otherwise, the longer-term cooling inflation trend is still in place. The Fed had already made clear that rate cuts weren’t going to happen as soon as many people wanted them to. Today was simply a reminder of why they were inclined to wait.”

The disinflation process is not a straight line — and one hot print on its own after an extended string of more favorable releases does not represent a new trend, said Josh Jamner at ClearBridge Investments.

The surprise jump in the January consumer price index probably will be less pronounced in the Fed’s preferred inflation gauge and potentially less alarming to central bank officials as they weigh when to cut interest rates. Based on the latest CPI figures, the personal consumption expenditures price index excluding food and energy — due from the Bureau of Economic Analysis on Feb. 29 — probably rose 0.29 per cent last month, Morgan Stanley economists said.

“The CPI data has disrupted the string of Goldilocks growth and inflation data that had helped to lift the S&P 500 over 5,000,” said Brian Rose at UBS Global Wealth Management. “But it doesn’t change our positive fundamental outlook for 2024 of solid growth, further disinflation, and the start of Fed rate cuts in Q2 that is supportive of risk assets.”

More Comments on CPI:

Skyler Weinand at Regan Capital:

  • “Getting to the Fed’s magical 2 per cent inflation target may prove more difficult than expected and result in elevated interest rates for a longer period of time.”

Rob Swanke at Commonwealth Financial Network:

  • “This is certainly not the news that the Fed will be looking for in order to begin cutting rates. So we may be on hold for several more months.”

Paul Toft at Key Private Bank:

  • “We remain aligned with the Fed’s comments of being more cautious in when to start cutting rates, and we believe the first rate cut will not come until the June or July meeting.”

Neil Birrell at Premier Miton Investors:

  • “We are not at the stage of worrying about inflation reaccelerating, but we are not out of the woods yet either.”

Quincy Krosby at LPL Financial:

  • “The ‘last mile’ - as expected - is proving to be stickier and more stubborn inhibiting even the most dovish wing of the FOMC.”

Bryce Doty at Sit Investment Associates:

  • “From the Fed’s perspective, economic growth is strong enough that there isn’t a sense of urgency on cutting rates. In the meantime, bond investors will get to enjoy higher yields a little while longer than many thought.”

Jim Baird at Plante Moran Financial Advisors:

  • “There’s still a viable path to a soft landing, but the January inflation report is a reminder that getting there won’t be a walk in the park.”

Lauren Goodwin at New York Life Investments:

  • “Though the timing of a Fed rate cut is uncertain, most investors are betting that a cut is the next move. Investors can consider locking in higher policy rates before Treasuries reflect lower rates in the coming months.”

Alexandra Wilson-Elizondo at Goldman Sachs Asset Management:

  • “A delayed Fed means a focus on cash rich companies that benefit from higher real wages and a strong consumer, rather than on cyclicals that have indebtedness in floating rate form. For rates, we have kept dry powder for better entry points into the market as it reprices the central bank delay and valuations are more appealing with better risk/reward.”

Well ahead of the CPI report, Bank of America Corp. clients posted the largest outflows from U.S. equities in five weeks in the period ended last Friday.

Clients were net sellers of U.S. equities last week, withdrawing $1.9 billion from the asset class — the most in five weeks, BofA quantitative strategists led by Jill Carey Hall said.

Investors are going “all in” on U.S. technology stocks as they turn the most optimistic about global growth in two years, according to a separate survey by BofA.

Allocation to tech is now at the highest since August 2020. Exposure to U.S. equities more broadly has also risen, while easing macro risks prompted investors to trim cash levels by 55 basis points from January. Previous such declines in cash levels were followed by stock market gains of about 4 per cent in the following three months, strategist Michael Hartnett wrote in a note.

U.S. equity futures had a sharp turn to bullish flows in the middle of last week, ending it with $18 billion new longs in S&P 500 futures, according to Citigroup Inc. strategists. 

Nasdaq 100 futures also had $7.4 billion new longs, and long positioning on the benchmark is very extended and completely one-sided, a team led by Chris Montagu wrote.

Corporate Highlights:

  • Boeing Co. plans to build its 737 Max aircraft at a slower pace during the first half of this year as it tackles quality issues and supplier glitches under the close supervision of U.S. aviation regulators, Chief Financial Officer Brian West said.
  • Krispy Kreme Inc. said it’s expecting double-digit price increases in some of the ingredients for its doughnuts, highlighting the cost pressures facing U.S. companies.
  • Coca-Cola Co. gave a 2024 organic revenue outlook that beat expectations, with a diverse group of products expected to boost results.
  • GlobalFoundries Inc., the largest U.S. maker of made-to-order semiconductors, gave a lackluster revenue forecast for the current quarter, indicating that a glut in industrial and automotive components is still weighing on orders.
  • AutoNation Inc., one of the biggest car dealership chains in the U.S., beat analysts’ fourth-quarter profit and sales expectations.
  • Marriott International Inc. reported fourth-quarter earnings that topped estimates as the company benefited from demand growth outside the U.S.
  • Biogen Inc. reported fourth-quarter revenue that missed analysts’ expectations as the company’s multiple sclerosis drugs continued to decline.
  • Shopify Inc. reported sales and profit for the fourth quarter that narrowly beat analysts’ estimates, suggesting the Canadian e-commerce giant fended off competition from Asian shopping platforms like Temu, Shein and TikTok.
  • Activist investor Carl Icahn disclosed a 9.91 per cent stake in JetBlue Airways Corp., calling the stock undervalued, and said he’s had talks with management about the possibility of representation on the board.
  • ASML Holding NV dropped in the first minutes of trading before quickly recovering, with traders blaming the unexpected slump on an erroneous trade.

Key Events this Week:

  • Eurozone industrial production, GDP, Wednesday
  • BOE Governor Andrew Bailey testifies to House of Lords economic affairs panel, Wednesday
  • Chicago Fed President Austan Goolsbee speaks, Wednesday
  • Fed Vice Chair for Supervision Michael Barr speaks, Wednesday
  • Japan GDP, industrial production, Thursday
  • U.S. Empire manufacturing, initial jobless claims, industrial production, retail sales, business inventories, Thursday
  • ECB President Christine Lagarde speaks, Thursday
  • Atlanta Fed President Raphael Bostic speaks, Thursday
  • Fed Governor Christopher Waller speaks, Thursday
  • ECB chief economist Philip Lane speaks, Thursday
  • U.S. housing starts, PPI, University of Michigan consumer sentiment, Friday
  • San Francisco Fed President Mary Daly speaks, Friday
  • Fed Vice Chair for Supervision Michael Barr speaks, Friday
  • ECB executive board member Isabel Schnabel speaks, Friday

Some of the main moves in markets:


  • The S&P 500 fell 1.4 per cent as of 4 p.m. New York time
  • The Nasdaq 100 fell 1.6 per cent
  • The Dow Jones Industrial Average fell 1.4 per cent
  • The MSCI World index fell 1.2 per cent


  • The Bloomberg Dollar Spot Index rose 0.6 per cent
  • The euro fell 0.6 per cent to $1.0707
  • The British pound fell 0.3 per cent to $1.2589
  • The Japanese yen fell 1 per cent to 150.78 per dollar


  • Bitcoin fell 0.9 per cent to $49,400.8
  • Ether fell 0.1 per cent to $2,629.74


  • The yield on 10-year Treasuries advanced 14 basis points to 4.31 per cent
  • Germany’s 10-year yield advanced three basis points to 2.39 per cent
  • Britain’s 10-year yield advanced nine basis points to 4.15 per cent


  • West Texas Intermediate crude rose 1.1 per cent to $77.78 a barrel
  • Spot gold fell 1.4 per cent to $1,992.54 an ounce