Investors Remain Cautious ahead of Important Inflation Data

By Joyce Yu

Philadelphia, PA–Global markets were relatively calm on Tuesday ahead of closely watched Wednesday’s report on the U.S. consumer price index. Three major U.S. stock indexes drifted 0.3% lower in morning session.

Inflation has been touted the culprit of recent stocks market turmoil. The core CPI, which excludes food and energy, rose 1.7% in January from a year earlier, compared with 1.8% in December, according to the median projection of economists surveyed by the Reuters.  Month-on-month, the same index may be 0.2% higher and this would result in a three-month annualized rate of 2.3%, according to analysts at Wells Fargo Securities. That would be the fastest pace since February 2017.

Wall Street has been traded in wild ranges of late as concerns of faster than expected inflation spurred expectations that Federal Reserve would quicken its plans for tightening. Strong job and wage figures issued earlier this month sent Treasury yields spiking, prompting fears of increasing borrowing costs. Investors became panic as a result.

Analysts have different views about the impact of inflation on equity market. “Markets seem primed for inflation risk right now, and so because of that there may be a bigger response” to the monthly reading, said Sam Coffin, an economist at UBS Securities LLC. Given strong consumer demand, companies “have decent pricing power and are likely to pass these higher costs on through their prices,” ING chief international economist James Knightley said in a note. Sam Stovall, chief investment strategist at CFRA Research in New York, on the other hand, said, “Corrections that develop over a very short time frame tend to bottom more quickly and recover more rapidly than your garden variety correction.”

In its February Fund Manager Survey, Bank of America Merrill Lynch notes that 60% of professional investors also say inflation and troubles overall in the bond market pose the biggest threat of a “cross-asset crash.” Respondents overall are more pessimistic amid the market turmoil and they indicate that the bull market likely will peak with the S&P 500 at 3,100, or about 17 percent above current level. However, 91 percent still say a recession is unlikely.

“We just don’t see a bear market starting with the economy as strong as it is,” Ryan Detrick, senior market strategist at LPL Financial in Charlotte, North Carolina, told the Reuters. “You rarely see bear markets during a non-recessionary environment.”