CNBC Daily Open: U.S. inflation rose more than expected. But stocks held steady

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U.S. inflation is starting to bite again. But stocks mostly shrugged it off.

• January’s U.S. consumer price index rose 0.5%, higher than the 0.4% forecast by economists. On a year-over-year basis, prices increased 6.4%, compared with the expected 6.2%. Egg prices were still sky-high.

• U.S. stocks closed Tuesday mixed. The Dow Jones Industrial Average and the S&P 500 edged lower, while the Nasdaq Composite rose. After a positive trading day, Asia-Pacific shares mostly ended lower, with only China’s Shanghai Composite and Shenzhen Component remaining in the green.

• Yields of U.S. Treasurys climbed after a hotter-than-expected inflation report. The 6-month Treasury, notably, surged to close at 5.022%, its highest yield since July 2007.

• PRO U.S. Treasury yields are popping again. The 10-year Treasury’s yield hit a five-week high this week, while the 2-year has risen 0.41 percentage points in February alone. This is how pros would play the market.

January’s hotter-than-expected CPI report cast a shadow over U.S. markets yesterday.

Prices in the U.S. last month increased faster than economists had anticipated; they were pushed up by higher food, energy and housing costs. Yet even the core CPI — which strips out the more volatile food and energy prices — saw a monthly bump of 0.4% and a year-over-year jump of 5.6%. Both exceeded respective estimates of 0.3% and 5.5%.  

Is the disinflationary process — in the words of Federal Reserve Chair Jerome Powell — still in play in the U.S.? January’s core CPI of 5.6% is a tiny notch lower than December’s 5.7%, which means that prices are still tapering off. But just barely.

U.S. markets reacted accordingly. Treasury yields rose, suggesting that investors are pricing in higher interest rate hikes by the Fed. Stocks fell. The Dow slipped 0.46% and the S&P dipped 0.03%. However, the Nasdaq, traditionally the most interest rate-sensitive index, closed 0.57% higher, buoyed by a 7.51% surge in Tesla and a 5.43% jump in Nvidia.

Though stocks mostly fell, they were remarkably resilient. A team at JPMorgan had forecast that the S&P would sink between 0.75% to 1.5% should yearly CPI come in at 6.4%. The actual drop in the index: only 0.03%.

The strange disconnect between bond markets and stock markets continues. Investors might be optimistic that consumer spending will remain strong even amid rising prices — as Coca Cola’s earnings report indicated — hence allowing the economy to keep growing. As for that theory, Wednesday’s U.S. retail sales report will put it to the test.

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