Subjective market review (16-Feb-2024). On the fourth trading day after the publication of US January inflation, the stock market completely ignored it and we are now above the levels when the inflation was released - see Figure 1.
I assume that ultimately the stock market may ignore inflation even to levels of 4.5% for Core CPI (currently 3.87%). Figure 2 is the same chart, but in absolute percentage terms.
While stocks can ignore inflation for longer, bonds cannot. Currently, 10Y yield is around 4.27% (was 4.15% at the time of inflation publication). On the charts there is the price of 10-year bond (T-Note) to more easily show the percentage change. So the price of the 10-year bond only recovered about 30% of its decline.
Bonds were also not "fooled" by yesterday's retail sales data, which turned out to be so weak mainly for technical reasons and it is unlikely there is a change in the trend in the spending of the American consumer (seasonal adjustments had a strong effect, and not only for January itself (in January and in February they are the highest in the whole year), but also as a payback after too favorable adjustment factor in December; additionally the cold weather in January probably also had an impact on the decline in sales).
In order for stocks to react negatively to the inflation reading, in my opinion, another miss/shock of a similar size is needed as in the case of January's inflation, and such a chance is likely only with the inflation reading for February 2024 (publication only on March 12). PCE inflation for January published at the end of February should no longer surprise the markets.
Cleveland FED Inflation Nowcast indicates headline inflation for February at 3.06% YoY and 0.37% MoM (in January it was +3.11% and +0.305%), and in the case of Core CPI +3.70% YoY and + 0.32% MoM (in January it was +3.87% and +0.39%).
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