Markets slump after a hotter-than-expected CPI report

Dow sank 441, decliners over advancers 4-1 & NAZ dropped 117.  The MLP index slid 1+ to the 316s & the REIT index dropped 5 to the 404s.  Junk bond funds drifted lower & Treasuries were heavily sold which raised yields (more below).  Oil was off 1+ to 72 as US crude supplies climbed & gold pulled back 13 to 2919.

Dow Jones Industrials

Inflation ticked higher in Jan as stubbornly high prices continued to strain household finances as the Federal Reserve weighs a continued pause to its interest rate cut plans.  The Labor Dept said that the consumer price index increased 0.5% in Jan while it rose to 3% on an annual basis.  The annual figure is the highest since Jun 2024.  Both the annual & headline CPI figures were hotter than the estimates for inflation to rose 0.3% on a monthly basis & 2.9% from a year ago, & came in higher than last month's readings of 0.4% & 2.9%, respectively.  Core prices, which exclude more volatile measurements of gasoline & food to better assess price growth trends, were up 0.4% in Jan & 3.3% on an annual basis, hotter than expected.  The forecast called for a monthly rise of 0.3% & annual increase of 3.1%.  Both figures were 0.1 percentage points higher than last month.  The report showed that inflationary pressures in the US economy remain persistent despite progress in bringing inflation closer to the Federal Reserve's 2% target over the past 2 years.  High inflation has created severe financial pressures for US households, which are forced to pay more for everyday necessities like food & rent.  Energy costs rose 1.1% in Jan, a slower pace than the 2.4% reading in Dec.  Gas prices were up 1.8% last month, while natural gas prices increased by the same amount.  Food prices increased 0.4% in Jan.  The food at home index was up 0.5% for the month, with a 15.2% increase in the cost of eggs accounting for about 2/3 of the its total increase.  Prices of fruits & vegetables helped offset some of the index's increase, falling 0.5% for the month, while cereals & bakery products also decreased by 0.4%.

Inflation rises 3% in January, hotter than expected

Treasury yields rose sharply as investors reacted to the hotter-than-expected January consumer inflation report. The 10-year Treasury yield jumped 9 basis points at 4.627%, while the 2-year Treasury yield rose more than 7 basis points to 4.363%.  Yields & prices move in opposite directions & 1 basis point equals 0.01%.  The hot inflation report could push expectations of the next Federal Reserve rate cut further into the future.  The Federal Open Market Committee chose to keep rates unchanged last month after cutting in the previous 3 meetings.  Yesterday, Fed Chair Jerome Powell appeared before the Senate Banking Committee, & said the central bank “doesn’t need to be in a hurry” to cut interest rates further. “We know that reducing policy restraint too fast or too much could hinder progress on inflation. At the same time, reducing policy restraint too slowly or too little could unduly weaken economic activity and employment,” Powell added.  Powell will again speak before the House Financial Services Committee tomorrow. The producer price index will be published tomorrow. 

10-year Treasury yield shoots above 4.6% after hot CPI report

Mortgage rates moved slightly lower again last week, keeping refinance demand on the rise.  Applications to refinance a home loan jumped 10% compared with the previous week & were 33% higher than the same week 1 year ago, according to the Mortgage Bankers Association's (MBA) seasonally adjusted index.  That came after a 12% gain the previous week.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766K or less) decreased to 6.95% from 6.97%, & points remained unchanged at 0.64 (including the origination fee) for loans with a 20% down payment.  “Mortgage rates moved slightly lower last week, which led to the pace of refinance applications reaching its strongest week since October 2024,” said Joel Kan, VP & deputy chief economist at the MBA.  “The average loan size for refinance borrowers increased, as these borrowers tend to be more responsive for a given change in rates.”  Roughly 17% of homeowners with a mortgage have interest rates either at or above 6%, according to Redfin, the highest level since 2016.  With rates now near 7%, however, there are still very few who can benefit from a refinance, given both the rate and the cost.  The percentage increases may be large week to week, but they are coming off a very low volume.  Applications for a mortgage to purchase a home declined again, falling 2% for the week.  Demand was 2% higher than the same week 1 year ago.  Potential buyers are still facing a pricey & lean market. Most of the activity is now happening on the higher end.  “The average loan size for a purchase application increased to its highest level since March 2022 at $456,100, partially driven by fewer FHA purchase applications but more VA loans compared to the previous week,” Kan added.  Mortgage rates moved very slightly higher to start this week, according to a separate survey from Mortgage News Daily.  Critical data on inflation today, the monthly consumer price index, however, could make for a more definitive move.  “There’s plenty of anxiety over this one as early year inflation data is notoriously more difficult to forecast,” wrote Matthew Graham, chief operating officer at Mortgage News Daily.  “In addition to forecasting difficulty, markets are also eager for clarity on whether inflation continues stalling at prevailing levels or begins to make renewed progress toward the 2% target.  Needle-threading is always possible, but any major indication in one direction or the other will likely give rates a big push in the logical direction.”

Mortgage refinance demand jumps to highest level since October, but homebuyers pull back again

Stocks fell as investors digested a hotter-than-expected Jan inflation reading.  The Consumer Price Index (CPI) reported headline consumer inflation rose more than forecast in Jan.  The surprise inflation data pushed back investor bets on interest-rate cuts in 2025.  Traders are pricing just 1 interest-rate cut, after pricing in 2 for most of the year.  The 10-year Treasury yield added 11 basis points to hit 4.64% following the inflation data.