By Suzanne McGee and Saqib Iqbal Ahmed
(Reuters) – A relatively benign reading of U.S. consumer price gains sparked a strong rally in stocks and bonds on Wednesday, but traders and investors warned markets were likely to remain concerned about the pace of inflation.
The road ahead remains overshadowed by ongoing uncertainty over the prospect of further interest rate cuts by the Federal Reserve and President-elect Donald Trump’s actions on issues such as taxes and tariffs, market participants said.
“The issues that pushed up rates and weighed on stocks are still there,” said Art Hogan, market strategist at B. Riley Wealth. “We just don’t know if we’re going to see tariffs that are surgical or across-the-board, what kind of policy moves we’re going to see in other areas that could affect inflation or growth.”
While the consumer price index for December rose at a faster-than-expected pace, markets benefited from the core CPI, which excludes volatile food and energy components. Core CPI rose 0.2% in December after rising 0.3% for four consecutive months.
Stocks rose after the CPI report, with the benchmark jumping 1.8%.
The benchmark 10-year Treasury pared losses after last Friday’s strong jobs report, lowering yields to 4.66%. Yields fall when bond prices rise.
“This reading slightly beat expectations, but traders are aggressively attacking any hint of good news,” said Steve Sosnick, market strategist at Interactive Brokers (NASDAQ: ). “It’s a number and a reaction that we have to look at positively, although it’s very possible that it’s magnified by the negativity we’ve been dealing with.”
Yields have risen sharply in recent weeks after the Fed softened its outlook for a rate cut in December and predicted tighter inflation in 2025 than previously.
Before the CPI report, “there were rumblings that we might actually see interest rate hikes,” said Jeff Weniger, head of equity strategy at WisdomTree Inc., a New York-based asset manager.
But fears about the possible effects of Trump’s policies on inflation remain a concern. Fed officials on Wednesday noted increased uncertainty in the coming months as they await the first glimpse of the new administration’s policy, although they said Wednesday’s data showed inflation continued to ease.
After the CPI report, Rick Rieder, BlackRock’s chief investment officer for global fixed income, said that progress in inflation “could be slow and uneven, not least because of the large uncertainties facing the economy with fiscal policy changes coming over the next years.”
For example, Rieder said in emailed comments that changes to the tariff and trade regime “have the potential to increase core inflation for some time.”
As the market continues to depend on data, volatility could become more common. Kevin Flanagan, head of fixed income strategy at WisdomTree, expects moves of 10 to 15 basis points a day for the 10-year Treasury could become the new norm.
After the data, interest rate futures traders still predict the Fed will wait until June to make its next rate cut. But they now estimate equal odds that the central bank will follow through with a second rate cut by the end of the year. Before the report, markets reflected bets on just one cut in 2025.
Tina Adatia, head of fixed income client portfolio management for Goldman Sachs Asset Management, said in a note to clients that the CPI data strengthened the case for further cuts, but “the Fed has room for patience.”
“More good inflation data will be needed for the Fed to achieve further easing,” Adatia said.
